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articlechoice.docxNumber 1：
Snapchat Performance Metrics vs. Value
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The article I'd like to discuss, entitled, "Snapchat's Revenue Gap is an Opportunity"1, was a very interesting read, and was full of concerns as to the validity of the arguments made.
For historical background, Snapchat is a social media platform primarily aimed at temporary photo and video content that disappears after a short viewing period. It also has "Stories" where users can subscribe to other users, including companies that advertise. There are many ad-serving vehicles within Snapchat which tend to be the primary revenue driver2. Snapchat had its IPO in March 2018, peaking at $21.22/share, and subsequently dropping off to $10.50 only to level off to $13.47 as of this afternoon (6/12/18)3.
Back to the article, the author argues that the relative ARPU (average revenue per user) to total stock valuation of Snapchat ratio makes Snapchat look like a more attractive buy than Facebook. There are several troubling aspects to this claim. First, let’s discuss ARPU. This is a typical metric in SaaS, social media and other internet driven businesses. It is calculated as follows:
ARPU = Monthly Recurring Revenue / Total Number of Users4
Total revenue is straightforward—however, how is an Average User (or Unit in some cases), defined? For example, does this number consider a rolling average during the period that revenue is determined, or is it perhaps a snapshot in time? What about users with multiple accounts, that represent just one user? Or, consider the fact that “total number of customers” is a very macro metric and may not represent outliers, exclusions or other factors.
Secondly, the article leads one to believe that the ratio of ARPU to stock market value is referring to market capitalization, but it does leave room for assumption.
Thirdly, why is the ratio of ARPU to Market Cap relevant? Let’s look at the figures. Snapchat is said to have an ARPU of $2.17, whereas Facebook has an ARPU of $27.35. Snapchat’s market capitalization is $15.59B3 as of today, and Facebook sits at $554.65. Therefore, we’re comparing a ratio of 7.9% for SnapChat vs. 4.9%. The article presupposes that a higher ratio indicates better performance—but what is this anchored in? It leaves much to the imagination. The article does not give any real insight into a wider swath of these ratios outside of Snapchat and Facebook, leaving one to wonder how relevant the comparison is.
Lastly, the article really doesn't delve into any of the standard metrics such as RoE, EPS, etc. to determine true valuation comparables.
To the writer’s credit, they do determine at the end of the article that SnapChat has a few issues that may discredit the core idea of the article, and that as usual, it’s about execution of business that will really win the day.
1https://www.bloomberg.com/news/articles/2017-12-04/snapchat-doesn-t-look-insanely-valued-relative-to-facebook
2https://www.investopedia.com/articles/investing/061915/how-snapchat-makes-money.asp
3https://www.marketwatch.com/investing/stock/snap
4https://www.chargebee.com/resources/glossaries/saas-metrics/arpu/
number 2：
Big Tobacco Valuation - Big Missing Piece
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The report/analysis I read was on Altria Group, the largest domestic tobacco manufacturer. I'm a shareholder in the company, so I'm always curious about the news surrounding it's value and the pulse on the future of the company. The report was titled "Altria - A $62 Discount Cash Flow Valuation" - the writer worked up his own DCF valuation for the company.
Starting with a positive, he mentioned the huge tax benefits the company received from the president's Tax Reform bill passing in early 2018. The company was previously one of the highest corporate tax payers at ~33% before, and now has an estimated effective tax rate of ~23%. Getting this number correct significantly increased the free cash flows from FY 2017 to FY 2018.
Performing a DCF valuation vs. a different type is, in my opinion, the error the writer made here. By performing this type of valuation, he did not include the company's 10.2% ownership stake in AB InBev that drives big income year after year. As we've learned so far in the course, a DCF valuation isn't the right choice for companies with high cash investments. Cash investments are treated as a bad thing in DCF, as it reduces free cash flow every time an investment is made. This cash investment into AB InBev by Altria is significant, and would certainly increase the 'estimated value' put forth in this report.
An additional error is his assumption of 2% net working capital. Correct valuations can never be based off of what we assume will happen in the future. His reasoning for it seems off as well, saying that because Altria has had "excessively negative net working capital in 2017... the company has to make working capital investments in the coming years." While he does state in the report that it's difficult to forecast, I didn't see any research presented on how he arrived at the figure for his valuation, or why he believes they "have" to make capital investments soon. It's possible the company can go several more years without needing to invest in new manufacturing equipment or facilities and survive.
Article Link: https://seekingalpha.com/article/4178405-altria-62-discount-cash-flow-valuation
Number 3：
Calm App hits $250m Valuation
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I came across this article on the meditation app Calm, which is now raising funds against a $250m valuation. This article does a pretty good job describing some of the high level numbers and the business model for Calm. I think when bumped up against the tenets of investing that we are learning in this class, this company would be a great investment... if you can get in!
1. One does not buy a stock, one buys a business... so when buying a business, know the business! In this case, Calm is a business focused on providing people tools to enhance their mental wellness. As a business, this would be considered an emerging market, but has enough solid history to anchor a valuation. This business offers a subscription model, where for roughly $59.99 per year, the user can access various content designed to help improve areas like gratitude, anxiety, stress, happiness, and sleep. As a business, this model has two major advantages. First, the subscription model is increasingly popular amongst consumers who are cash strapped, and would rather pay little by little, than be forced to pay large amounts of capital for services. Second, the topic of mental health and wellness is more popular, and less taboo, than ever before. In the wake of recent episodes of mass violence and celebrity suicide, many popular celebrities - The Rock, Kevin Hart, Oprah, etc. - have spoken about their focus on mental wellness. So much so it is almost considered COOL to be focused on mental wellness. This bodes exceptionally well for apps in the mental wellness space.
2. Anchor a valuation on what you know, rather than speculation. While the above commentary on the business model is more speculative than concrete, the actual numbers for Calm support a high valuation. In this case, the app added an additional $22m in revenue for 2017, which pushes their annual run rate for revenue to $75m. A Software as a Service valuation article on medium.com, implies that for companies focused on recurring revenue, valuations are usually tied to a metric called ARR or Average Recurring Revenue. For exceptional companies, the ARR multiple for valuation could be as high as 15x, while on the low end, the multiple would be closer to 5x. This is great news for potential Calm investors, as their current ARR multiple would be ~ 3.33x. Which means there is a lot of upside value for future investors as the app's revenues increase.
All in all, this seems like a great mix of solid fundamentals - high recurring revenues, scalable value in the app content, positioned well in a rapidly increasing market - mixed with low risk speculative projection. If I was able, I would definitely invest in the Calm App. As it is, I will simply download and pay my $60 to try to reduce my anxiety levels :)
Article Link: https://techcrunch.com/2018/06/20/meditation-app-calm-hits-a-250m-valuation-amid-an-explosion-of-interest-in-mindfulness-apps/
Medium Article: https://medium.com/@alexfclayton/how-much-is-your-saas-company-worth-82451bc44433
Number 4：
Fighting Speculation with Speculation
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In the Wall Street Journal article “Betting on New S&P 500 Stocks Like Twitter? It’s a Risky Game” the author argues that stocks increase when included in the S&P 500, but those gains “fade over time” (all references to time frames in the article were one year). The author states that “data challenges the assumption that index inclusion boosts long-term stock performance…” The author’s point is that speculation has driven Twitter’s stock up, but unfortunately only challenges it with speculation of his own.
The author states that stocks outperform the index by 17% prior to inclusion, but lag 4.1% behind the index the first year after inclusion. He then provides an example of a company that overperformed prior but underperformed after inclusion. Nektar Therapeutics quadrupled in the six months prior to inclusion, then dropped 51% after. The problem with this comparison is that this is a biotechnology company, so it’s strange to compare it to Twitter. He seems to suggest that it was inclusion that drove the stock price up, when in reality it was excitement over positive clinical trial results in treating melanoma. The stock then tumbled when future patients were not responding well. The author implies that what caused this rise was inclusion into the S&P 500, not positive results of clinical trials.
The author states that Twitter has doubled in the year before its inclusion in the S&P 500 and clearly disagrees with this rise, but he does very little analysis of the company to justify his position. He quotes the chief investment officer of Ritholz Wealth Management as saying about Twitter, “Anything that’s run up that much will eventually come back down.” He doesn’t take into consideration that this rise was after an 80% decline from stock highs. He then mentions that analysts’ average price target is 25% below current levels. This is the direction he should have taken the article. He should have discussed why analysts think this, why the stock is overpriced, how the business is not fundamentally sound, etc., but instead chose to argue that stock prices jump when entering an index and should be avoided.
An in-depth analysis of Twitter would probably reveal that this rise is somewhat speculative, but the author chooses to fight that speculation with speculation of his own. Choosing to not invest in a company because it is being included in the S&P 500 could lead to some serious missed opportunities. This is not a good substitution for fundamental analysis of individual companies.
https://www.wsj.com/articles/betting-on-new-s-p-500-stocks-like-twitter-its-a-risky-game-1528709401
number 5：
Wikisoft's Expected Valuation Rockets to $185 Million
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This article states that Wikisoft is going to IPO later this year, and is seeing it's valuation rise pre-IPO, now in the neighborhood of $185m. What's interesting is that this valuation seems purely speculative. There are no real financial models from which to build this valuation.
It would seem that Wikisoft shareholders are planning to derive the majority of their value from the upcoming full launch of the 'Wikiprofile' site. Wikiprofile, was deemed the "Wikipedia for Business", and boasts over 400 million published articles primarily designed to help businesses conduct their business more efficiently. What's interesting though, is that while the site boasts a large library of content, the site is only released in beta, and does not boast a very large network of users. Further, the company explicitly states that they will not take advantage of advertising revenues by displaying content to future users. Instead, they will rely on revenues generated from companies and business leaders who are opting to have their profiles verified and updated by professional editors for an annual fee. The IPO and the post-beta launch of Wikiprofile both are slated for August. This means that investors are essentially betting on the success of this company, and will have little to no time to evaluate the full launch before committing to an IPO investment.
What makes this investment attractive is what the financial model COULD look like, should Wikiprofile simply choose to advertise to their users. According to Monetize Pros (link below) the sister site to WikiProfile, Wikipedia.com, is missing out on approximately $2.3b per year in advertising revenues, as it too chooses not to advertise to their users. An investor willing to make a small investment now, in the hopes that Wikiprofile eventually turns on advertisements, would stand to make a fortune if the advertising becomes reality. Though again, this is all speculative, and is not the proper basis for valuation of this upcoming stock.
From reading the article, it sounds like initial investor interest has ignited follow-up investor interest. Which means that this value is based primarily on the water cooler philosophy that "if Bob thinks it's a good idea, it must be a good idea" which is the wrong way to value an investment.
Given that there are no revenues, costs, or sales forecasted or provided at this juncture, it is hard to assign anything more than a speculative value to Wikisoft... which in my mind is not worth $185million.
Main Article Link: https://globenewswire.com/news-release/2018/06/15/1525112/0/en/Wikisoft-s-Expected-Valuation-Rockets-to-185-Million-USD-Ahead-of-IPO.html
Referenced Article Link: https://monetizepros.com/features/analysis-how-wikipedia-could-make-2-8-billion-in-annual-revenue/Bottom of FormBottom of Form
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