To market, to market to buy a fat pig. Another day another record. Phew, that is getting a little monotonous, but I bet it sounds better than will Greece fall out of the Eurozone. Or, will the US default. Or, some other such disaster, double dipping, austerity and the list goes on and on and on. In the absence of the news of scrambling politicians, central banks and puzzled analysts/professionals all at the same time. Right now the debate around the affordable healthcare act rages on in the US, even the creators of SpongeBob have weighed in, Mr Krabs in an upcoming episode fires the Yellow square panted fellow to save a nickel because the economy is that bad.
SpongeBob says something along the lines that he won't live off the government and sets out to find a job. So this has sparked a debate. Wow. About social welfare and the workplace, because the lazy co-worker, Squidward gets to keep his job because he was there longer. The square panted fellow offers to work for free, he loves flipping crabby patties, but Mr. Krabs says no, that is against labour legislation. A sponge that is alive, that works (or used to) as a short order cook is now more than just for kids, or couch potatoes, setting off a debate about labour laws and welfare? Yip. That is happening right now. I wonder how my favourite character in that show, Patrick Star (a pink starfish), the square panted fellows best mate. Hey, I have children, of course I watch these dumb shows. This much anticipated episode airs on the 11th of November, I am quite keen to see the reaction if there is any.
Meanwhile the Dow Jones Industrial clocked a new record, closing at 15746 points. The broader market S&P 500 edged closer to the all time high, close but not back. The nerds of NASDAQ are exactly nowhere near their all time high. 10 March 2000, 5048 points, the intraday peak is even further away 5408.6 points. So another 1000 points and then some more and we should be there, back at highs last seen when Palm Pilots were cool. Predictive text was pretty cool too (forget colour screens) and Netscape was the alternative browser that had crowded the others out.
Google was small, Facebook was nowhere, the Zuck was still at school no doubt in 2000. Ditto Twitter. Twitter was not at school, but rather not yet in existence. Apple was tottering. Microsoft is down 20 percent from that time. Yes, down, because the market hysteria and lack of thinking afforded technology companies crazy valuations. Cisco is down a whopping 66 percent from that March 2000 high when it was the worlds most valuable company at 557 billion Dollars. Lack of solid thinking, stocks were just going to the moon. Or so people thought at the time. Pets.com and the list goes on of internet businesses, Wikipedia have some splendid entries and some examples.
CyberRebate: Promised customers a 100% rebate after purchasing products priced at nearly ten times the retail cost. Went bankrupt in 2002, leaving thousands of customers holding the bag. The bankruptcy was settled in 2005 and customers received about eight cents on the dollar from their original rebates.
GeoCities – Purchased by Yahoo! for $3.57 billion in January 1999. Yahoo! closed GeoCities on October 26, 2009
The Learning Company, bought by Mattel in 1999 for $3.5 billion, sold for $27.3 million in 2000
Lycos – Purchased by Spanish telecommunications provider Telefónica for $12.5 billion in 2000 to expand its Terra Networks online platform. It was sold in 2004 to Seoul, South Korea-based Daum Communications Corporation for $95.4 million in cash, less than 2% of Terra's initial multi-billion dollar investment.
inktomi – Valuation of $25 billion in March 2000
OK, so those are just a few examples, there are many, many more. In the great ramp up of the internet becoming more important in peoples lives, we all got ahead of ourselves. And normal valuation metrics were tossed out the window, Buffett was even ridiculed because he was missing out, having not bought any internet companies. Well, at least the Oracle of Omaha had the last laugh, even if he did not reveal it publicly.
I managed to dredge some stuff up about why an analyst justified Cisco at 120 times earnings. Here it is: Firm's market cap climbing to $1 trillion. One of the analysts quoted in the article (George Kelly from Morgan Stanley Dean Witter) has some amazing justification of why Cisco at 120 times earnings is trading there, and why Intel (at 42 times earnings) and Microsoft (at 55 times earnings) are cheaper. Firstly: "A low P/E usually signals investors are uncomfortable". Before you say, what did Kelly know, you must remember that he was at the firm when they took Cisco public. He knew the company better than most, no slouch in the industry and not a fly by nighter.
Kelly also goes on to say, again justifying the high multiple: "One of the reasons investors value Cisco so highly right now is that, unlike Microsoft, Cisco doesn't have the uncertainty of a Justice Department settlement—it's a much cleaner situation. Second, Cisco has had a tremendous track record of continuous upside surprises. And Cisco is viewed as opening several new markets, the biggest of which is optical, which is expected to be an explosive market." I don't recall the specific settlements.
Another analyst, Paul Weinstein, from Credit Suisse believed that Cisco would get to 1 trillion Dollars before any other company, he is quoted in the above article as saying: "We humbly submit that over the next two to three years, Cisco could be the first trillion dollar market cap company" Again, Weinstein (from his bio here -> Paul Weinstein, General Partner) is and was no mug at the time, he was saying this stuff against the backdrop of strong earnings momentum.
You all know what happened after that. The story suggests that caution should have been the watchword, the market cap of Cisco was three times the annual revenue of the state of California. Just let that sink in for a bit. Where am I going with all of this? Well..... many are suggesting that we are in bubble territory with a small subset of stocks, in particular the social media stocks. Facebook for instance has a sales to market cap ratio of 24 times. Facebook trades on a forward multiple of 55 times, with expectations that the company will make less than a Dollar of earnings. At least they have earnings, right? And sales? Sales expectations for Facebook next year are for just over 11 billion Dollars. That is substantial. In 2015 sales are expected to grow by 50 percent, ditto earnings, but that would STILL mean that Facebook was trading at 35 times earnings.
Cisco saw sales climb from 8.4 billion in 1998, to 12.1 billion in 1999 and 18.9 billion Dollars by the middle of 2000, their year end. Last year revenue was 48.6 billion Dollars. The company's stock currently trades on a dividend yield of 2.9 percent and an earnings multiple of 12.5. At 2.6 times sales. And nobody views it as an opportunity of a lifetime now, but it was back then.
I am struggling with a conclusion here. All I know is that no two times in history are the same, I firmly believe that. Back then (1999/2000) the internet was going to change the world significantly and it did, we know that today. It was just not as quick as people anticipated, the change was slower, more modest. But we live in a world that is a LOT more advanced than 2000. Smartphones, tablets, the cloud, faster mobile and fixed line speeds. There are more people who could have access to the internet as a result of better and improving infrastructure.
In the year 2000 only 6 odd percent of folks globally had access to the inter webs (300 million people), according to Internet World Stats, by March of this year the number was 38.8 percent or 2.749 billion people. That is according to the ITU. Many more people could be poised to get internet access over the next decade, that would be critical for internet based (and by extension social media) businesses. So in terms of absolute customers, Intel, Cisco and Microsoft have many more now than in 2000. Major web browsers are only 20 years old. We are now in the app revolution. Cisco put out a document in May last year, which is really worth reading: Cisco's VNI Forecast Projects the Internet Will Be Four Times as Large in Four Years. I suspect the key parts in this document are the conclusion that I struggled with.
An increasing number of devices: The proliferation of tablets, mobile phones, and other smart devices as well as machine-to-machine (M2M) connections are driving up the demand for connectivity. By 2016, the forecast projects there will be nearly 18.9 billion network connections-almost 2.5 connections for each person on earth, - compared with 10.3 billion in 2011More Internet users: By 2016, there are expected to be 3.4 billion Internet users ― about 45 percent of the world's projected population
Faster broadband speeds: The average fixed broadband speed is expected to increase nearly fourfold, from 9 megabits per second (Mbps) in 2011 to 34 Mbps in 2016.
More video: By 2016, 1.2 million video minutes―the equivalent of 833 days (or over two years) -would travel the Internet every second.
I guess those numbers speak for themselves and do certainly set ones mind at rest about the newer internet businesses. And that leads beautifully into the topic that will dominate today, which Michael covers.
Michael's musings. Tweet, tweet, Twitter time. And the 7 most important letters.
Twitter has announced that they are going to sell 70 million shares today at $26 a share, making it the second biggest Internet IPO, only behind Facebook. Today's IPO will raise $2.1 billion and will give it a market cap of $14.4 billion (which I expect will be much higher by the end of the day), not bad for a company that still makes a loss. The original price offering range was $17-$20, which then grew to $23-$25 range, and due to the offering being greatly oversubscribed the investment bankers underwriting the IPO have decided that a price of $26 is the best price. The higher the listing price, the more money that Twitter will make, which is better for the company, so a higher price is a good thing. Twitter say that they are going to use most of the cash from the IPO to increase advertising and to grow their brand, which I think will be money well spent.
Twitter made a loss of $64.6 million in the last quarter ending in September, but having said that Twitter expects to grow their gross margins to 70% (compared to Facebook's 40%) in years to come, which should comfortable put them in profit territory. So why would you buy Twitter? It comes down to where to you think the world is moving? Twitters key to success is that 75% of their users are mobile and 70% of their revenue comes from mobile. Mobile is where the world is moving. The next place where I see value in the future is in data or more accurately, very large volumes of precise consumer information.
Twitter can provide that information through what people are tweeting and clicking on, 33% of people tweet while watching TV, providing valuable real time information to TV stations about who is watching and what they think about the show. Twitter also gets revenue from the ads that are placed in your Twitter feed, meaning that the more people who actively use Twitter the more money they should make. There are currently 232 million active users and that figure is currently growing at 6-7% a quarter (the number will get a nice boost from the IPO hype), which if maintained will double every 2.5 years. With there being over 7 billion people on the planet, they should comfortable be able to reach the 1 billion mark. Twitter is going to be one of the nails in printed media's coffin, because why would you want to get day old news, when you can get it as it happens from people who were there?
Moving onto the share price, and if you should put money into the stock. My personal opinion is that the share price will be higher at the close today as opposed to Facebook's last year. The first reason is that most of the shares being issued are new shares and not insiders trying to sell, which should lead to there be more people wanting to buy than sell. The next reason is that 75% of the shares in the IPO have gone to 30 investors, which we are lead to believe are 'long term' holders, but for me personally (I consider myself a long term investor), if the stock popped by 20-30% today, I would probably sell my stake and book it as some of the easiest gains I have made. If you have the stomach for a very bumpy ride, then Twitter is an option, they are a high growth, high margin, futuristic company who have yet to make a profit.
Home again, home again, jiggety-jog. Markets are really, really mixed here in Jozi, we have the retail stocks that are down 3.3 percent whilst the gold stocks are up nearly one and a half percent. A tale of two different sectors, for the year however the retailers are off just less than 10 percent whilst the gold shares are down more than 40 percent. But the reason that the retailers are stinking up the joint is a very, very average Truworths trading update.
Sasha Naryshkine and Michael Treherne
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