Tag: stocks

Will Coronavirus Kill the New Media Tech Giants? $FB $GOOG

We’re all locked inside. And that means we’re all watching Netflix, shopping Amazon, and perusing Facebook & Instagram and googling places we wish we could visit. That means all of these companies will benefit from the virus, right?  Facebook and Google must be killing it with advertising revenue.

Facebook just put out this somewhat misleading press release. In a gist, it says app usage is skyrocketing…

But….

“Much of the increased traffic is happening on our messaging services, but we’ve also seen more people using our feed and stories products to get updates from their family and friends. At the same time, our business is being adversely affected like so many others around the world. We don’t monetize many of the services where we’re seeing increased engagement, and we’ve seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.


Both Facebook and Google make money off of small-and-mid-sized businesses. While having a lot of users allowed them to begin charging businesses for ads, it doesn’t necessarily mean they are making money off all the users. More on that later.

The interesting thing about them is that they have been fast growing through the past ten years, but weren’t really around in the past. Therefore, the business model hasn’t really been tested through a real recession.

Advertising is cyclical. This makes some intuitive sense. When business is going well, you have extra funds left over that can be used for generating more sales. Or competition is higher because there is room for it and so you need to maintain market share. YOU may even be the new entrant trying to gain that share.

In a downturn, cuts have to be made. If I am a restaurant, I can’t really sacrifice much on food costs or labor or else my customers may have a bad experience.  If I also have a feeling that consumers don’t really want to spend money right now (e.g. unemployment is going up) then why not cut my advertising spend? It ripples through the chain.

As the saying goes, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” This has historically resulted in cuts to spend since CEOs don’t feel like they are getting the bang for the buck.

Here is a snapshot of “old school” advertising companies’ peak-to-trough in the Great Financial Crisis (GFC).

Note, for the TV broadcasters I am using 2-yr average results given election years play a factor in results.

I also use gross profit given incremental margins matter so much in advertising. Quick Segway: If I have an existing network of 10 billboards in a town and 9 of them are on rent, you can see how getting that last billboard on rent would result in meaningful profit to the bottom line. My sales go up ~11%, but my costs barely go up. True in nearly all advertising and very true for Facebook and Google. Ok back to the main points.

What Can We Expect from the Tech Behemoths

I highly doubt many people are truly thinking about Facebook or Google’s earnings declining at all in 2020, but it’s something worth pondering.

Facebook on its Q4’19 earnings call stated there are now, “140 million small businesses that use our services to grow.” Google, in its filings, specifically discusses how its targeted ads let small businesses connect with customers.

If the virus ripples through our economy, taking down small restaurants and bars, local gyms, and people pull back on buying cars from their local auto dealer — that could clearly impact Facebook and Google’s results. With most restaurants closed right now, why would I advertise as much?

Unfortunately, it’s impossible to see where Facebook and Google make their money by segment. It’s much easier to know that Yelp generates most of its money from restaurants looking to promote themselves in a competitive field. Not true for the tech behemoths though.

We have some financial history with Google, given its IPO was in 2004. The problem is that it was secularly growing during the GFC. Google does $162BN of revenue today. It did $16.6BN in 2007 at the “market peak”. It kept growing through the GFC, though growth did slow to just 8.5% in 2009 over 2008.

Sell side estimates currently expect 16.7% growth in 2020 for Google… on much larger numbers. Facebook is expected to grow 20%. These may prove aggressive.

Impact from the Virus

I do not think it is out of the realm of possibility that we could see sales growth slow meaningfully for the tech giants. This will lead to a reset of expectations, though admittedly, the two ad tech giants trade for reasonable multiples (believe FB is 12x earnings ex-cash). My larger fear is the reset of investors’ view of the business as whole — they may no longer be bulletproof.

That said, if I am in charge of an ad budget, this may accelerate my shift away from traditional media and to Facebook and Google. People are at home, shopping online, then why not. Plus, its super-high ROI advertising spend. In other words, I don’t pay Google unless someone clicks on the ad, so I’m only paying if the ad works.

This dynamic may finally get rid of the adage I mentioned above – I now know if my ad is working. And because of this we could see more resiliency out of the new advertising names and it could be a bloodbath for traditional names. However, it still holds true that I’m not going to buy an ad, or at least as many, when I’m struggling to pay payroll or rent.

Separate Challenges for Google

Google has been expanding in the travel space, in fact encroaching on ground owned by Booking’s Kayak or Expedia. Booking said in its latest 10-K:

Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have significantly more customers or users, consumer data and financial and other resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market and has grown rapidly in this area, including by offering a flight meta-search product (“Google Flights”), a hotel meta-search product (“Google Hotel Ads”), a vacation rental meta-search product, its “Book on Google” reservation functionality, Google Travel, a planning tool that aggregates its flight, hotel and packages products in one website and by integrating its hotel meta-search product into its Google Maps app.

 This is a problem for Booking and Expedia because they use Google to generate leads for their own sites. While Google may eventually consume these businesses, they also represent non-trivial amounts of their revenue.

Booking stated,

 Our performance marketing expense is primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites.

How much was “performance marketing” expense?  $4.4BN in 2019 for Booking and $3.5BN for Expedia.

I bring all of this up for a reason: While Google may eventually compete away these businesses, but today they matter. And those businesses are likely being crushed by the lack of travel demand right now, which will mean less spending with Google. These are just two companies, but ~5% of sales for Google. Now imagine every hotel chain, restaurant, airline and so on also pulling back… Now weave in the incremental margin we discussed earlier…


This virus is truly something we haven’t seen before. It permeates everything we touch. Long-term, I think Facebook and Google are amazing businesses to own, but don’t be surprised if 2020 is a hiccup and expectations are reset.

Time to buy stocks? Here are data points worth considering. $SPY

The market is clearly in panic. Americans and other global citizens in quarantine will clearly not help most businesses (and therefore it doesn’t help stocks). So should we buy stocks now?

One piece of data I came across this weekend was Open Table’s data on restaurant reservations, found here.  As shown below, the US saw a ~42% decline in reservations Y/Y and globally they are down 40%.

Not to mention, we have many public school closures, work travel has been postponed, cruises are putting up ships, and restaurants and bars are limited to take-out meals only. Heck, I can’t even go to the gym anymore. This will clearly crimp many businesses and could pressure liquidity.

This feels like SARS and 9/11 rolled into one. After 9/11, business confidence was hammered and many consumers were fearful and did not want to travel or go out to eat as much. United’s CEO said that this experience has been worse than 9/11 –

After 9/11, revenue was down 40% for two months and then began a gradual recovery… Our gross bookings in the Pacific are down about 70%, so there are still some bookings occurring even in the Pacific region. In Europe, our gross bookings are now down about 50%. Domestically, we’re currently seeing net bookings down about 70% and gross bookings down about 25%. While those numbers are encouraging compared to international, we’re planning for the public concern about the virus to get worse before it gets better.”

After 9/11, we had a tremendous shock to the system and it took some time to recover. Peak to trough, the S&P declined ~30% but within time, we recovered relatively quickly. Recall at this time, we entered a recession and also had a lot of air coming out of the tech bubble as well.

So on one hand, we have an extreme scenario. Short-term funding for a wide array of industries will need to be provided and I personally think we will need to see the US government step in meaningfully.

On the other hand, let’s look at the positives.

  • Short-term pain, long-term gain. It appears the US is now taking the virus more seriously. While there will be short-term pain from a quasi-quarantine, this will help damped the rapid spread of the virus. This will also prevent a overrun of our hospitals and healthcare system
  • Authorities acting relatively quickly. The fed has now cut rates 2x and initiated bond buying (QE5). Although this won’t cure the virus, it could help calm financial markets which will then allow for liquidity to flow through to businesses who need it now. While not established yet, I bet we will see a cut to banks’ reserve requirements to also help the system
  • Not a financial crisis. While there are financial aspects to this (i.e. liquidity, companies drawing on revolvers) this is not like the 2008 mortgage crisis. Although banks are now cutting GDP estimates for Q2 and Q3 2020, many expect that demand will rebound meaningfully.
  • The US is behind the curve, and that is a good thing. Although the outbreak is hitting US shores later than Europe and China, it also means we can look at their data to when cases tend to peak and level out. The US now is essentially in quarantine and that will help fight the spread. (Note, I thoroughly enjoyed the charts posted in this WaPo article for how social distancing actually does work). I think the market will move up even if cases in the US are rising once we see Italy, South Korea and China under control.
  • The biggest companies in the world are flush with cash. Add up the cash held by Apple, Microsoft, Google, Berkshire Hathaway, and Facebook. These businesses fortunately will not be facing liquidity needs, represent large proportions of the S&P, and have longer time horizons than most investors today.

With many stocks I look at down 50-60%, this could be an opportunity of a lifetime given they are pricing in a long-term pronounced downturn. As discussed previously, a one-year impact to earnings that everyone largely expects will be temporary has little impact on the intrinsic value of businesses.

In sum, do I think stocks can continue to go down? Yes. They have historically over shot in both directions. But we can’t time it. I personally am looking at a collection of businesses that will continue to compound earnings at extremely attractive rates.

In this case, I think the situation will be written about extensively. There will be things we don’t even know about yet that books will be published on. But as you think about the past and uncertainty, realize that those times are actually the best in terms of investing. Buying when everything looks amazing and nothing can go wrong typically turn out to be poor outcomes (e.g. peak of tech bubble, the calm before the 2008 storm). Everyone knows in hindsight to buy when others are fearful. I’d also add the richest people in the US are typically perma-optimists, not perma-bears.

Homebuilder stocks – what’s next? $LEN $TOL $DHI $NVR $TMHC $MHO $HOV

Given the market selloff, I’ve seen a lot of doom and gloom articles on buyers’ appetites for homebuilding. Will buyers still show up to buy a home with COVID-19 going around? What will the impact on interest rates have??

Check out these headlines:

All these headlines essentially result in one thing… Agh! Panic!

Panic

Since most people hold a majority of their net worth in a home, these headlines draw eyeballs.

But let’s think about this for a moment. Yes, the coronavirus may impact my willingness to go out to eat. To ride the subway. To cheer on my favorite team at a sports bar (looking at you March Madness).

But is it going to cause me to stop buying a house? Especially when credit is readily available and interest rates just hit all time lows for a mortgage?

I personally have trouble seeing it. And so far, we aren’t in quarantine and the data has been supportive:

  • Today it was announced that mortgage applications to purchase a home are up 5.6% Y/Y
  • Redfin today noted, “Demand is still growing at surprisingly healthy levels. And growth in the number of people submitting offers is much higher.”
  • Even at ground zero for coronavirus in the US, Seattle, they noted, “Now coronavirus fears have spread from Seattle to other parts of the country, but we haven’t seen a big impact on home-buying demand yet.”
  • Hovnian, a national builder and also the latest to report earnings had a lot of positive things on its results call:
    • Talking about reported results: “Some may say that the strong increase was against an easy comparison last year. I’m pleased to say we were also up 33% compared to the first quarter of 2018. Additionally, our sales pace was the highest level of contracts per community for any first quarter since 2005. It’s clear that the housing market is rebounding and demand for our homes continues to gain momentum.”
    • Regarding the virus impact specifically:  “Sales feel particularly and perhaps surprisingly steady and solid”

It makes sense. The 30 year mortgage rate has made it super compelling to buy a home:
30 Year Mortgage Rate Chart

30 Year Mortgage Rate data by YCharts

At the very least, those that own a home can refinance and keep some more cash in their pocket each month.

At the same time, we’ve been underbuilding in this country since the downturn. While we overbuilt in the last downturn, we’ve been growing as a country (creating new households) but new starts haven’t kept up. We’re just now getting to mid-cycle levels.

I personally am looking at the homebuilder equities. Toll brothers and Lennar are trading just above 1.1x BV. These are companies that have cleaned up their balance sheets and are generating ~13% ROEs. That seems cheap to me. Toll has also been buying back stock like its nobody’s business. This could even be a shot to buy NVR, a great blue-chip.

Could we see a pause? Sure. But I think the longer-term fundamentals are strong and that this virus won’t impact their intrinsic value.

CorePoint Q1’19 Recap: Asset sales are the real story $CPLG

CorePoint reported Q1’19 EBITDA of $43MM compared to $40MM estimates and $37MM last year.

Net/net this was an OK result. Obviously, EBITDA beat expectations. RevPar was up 3% according to the company, which is ahead of their 0-2% growth guidance. Unfortunately,  though, excluding the hurricane-impacted hotels of last year RevPar would’ve been down ~1%. EBITDA improved due to these hotels coming back online, but that was to be expected.

April was also looking slightly weak due to oil related market which the company noted was softer than Q1’19 as well as an outage at their call center.

Fortunately, the outlook was also left largely unchanged. The company filed an 8-K that shows they are taking steps to lower G&A (reducing headcount which should save 7% of G&A or $1.5MM).

As I noted in my prior post, the real developing story, Core Point is looking to divest “non-core” hotel assets. They had conducted 2 sales at very attractive multiples when they initially announced this.

They also announced 3 more hotel sales. The hotels carried an average hotel RevPar that was 25% lower than the portfolio average and the average hotel EBITDA margin was 700bps below the portfolio average.

Therefore the implied valuation for these 15x at EBITDAre or 2.5x revenue multiple, per the company disclosure. This is a great result. Let’s take a look at what that means so far for the five hotels sold:

We know from this chart below that there is still a lot of wood left to chop.

Since the 76 non-core hotels were already excluding the 2 asset sales sold for $4.5MM, there are still 73 hotels left worth $132MM of sales and $11MM of EBITDA.

This is important because the sales proceeds / multiples thus far have come well in excess of where CPLG is trading. CPLG currently trades at 9.9x 2019 EBITDA… If it can continue to divest non-core assets at multiples above where it trades, this could be very incremental to the stock, as shown below:

More than likely, the company will probably sell these assets for 2.0x Sales as they move forward, meaning CPLG would be trading at 8.4x on a PF basis. If the stock were to trade at 10x, this would mean it is worth $18.7/share, or 35% upside.

That said, I think that would still be too cheap given multiple ways to look at it, whether it be cap rate, book value, EV/EBITDA, etc. CPLG is too cheap.  Imagine if CPLG just traded at book value… the stock would be worth $21/share.

It seems to me that the reported book value as well as the JP Morgan valuation is looking more and more accurate.

The company has also started to buy back some stock. Per the earnings call, “Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV.”

Is Uber or Lyft stock a Buy?

Should you buy Uber or Lyft’s stock following the IPO? Both have caught a lot of attention in the wave of tech IPO’s that have hit the market this spring. Lyft already IPO’d and surged initially, but has since fallen 33%, which in turn hurt Uber’s expected valuation. Uber priced its IPO at $45 – the low end of its valuation range

I’ll try to help provide some insights into the businesses and “what you need to believe” to invest in these companies. The bull case for Uber and Lyft is that “transportation-as-a-service” or “TaaS” is a new market. While Uber and Lyft are fiercely competitive today, and unprofitable, the market is really 2 players (in the US) and that should ease over time (“think of the great duopoly’s of Visa and Mastercard” the bulls will tell you).

So let’s rehash the investment case:

  • “TaaS” is a large market and growing
  • Upside possible from the “end” of car ownership (and entry of autonomous cars)
  • These are “platform businesses” that can leverage their user base to expand into adjacent markets (UberFreight, UberEats, third-party delivery, scooters, bikes etc.)
  • Only two players today. Now that they are public, competitive behavior should cool as the CEOs will be beholden to new investors

I struggle with the last point for several reasons. Uber and Lyft are not actually the only two players – taxi’s do still exist. While you may not take one every time to the airport, they wait for you when you arrive in a new city as the marginal provider of transportation. When the Uber wait is too long or there is surge pricing, yellow cab is still there… My point is that pricing for Uber and Lyft can only go so high. And who knows if the companies that have succeeded in China and elsewhere are waiting in the wings to enter the US market (and drive down prices). 

If Uber and Lyft can’t raise the the price of your ride, maybe they take more of the driver’s fare. That’s possible, but they also have to incentize the drivers to drive and beat the hell out of their car. As I calculated in my post on what driver’s might make, it is a decent wage, but if you squeeze that too much, they just won’t drive anymore.

Do I think Uber is the Facebook of transportation? No. Facebook increased the return on investment for all advertisers and increased the total pie. Uber drove down the price of taxi medallions because it added significant supply to the market (everyone can now be a driver) and drove down prices.


The other bull case is that Uber or Lyft win the race to autonomy. The reason why this would be so important to the stocks is that autonomy is viewed as a winner-take-all business (think google maps – do you really need another provider?).

There again, I struggle. Calling the winner in autonomy is anyone’s guess. Why would I bet on Uber or Lyft winning vs. Google? I can’t, I can only speculate. And to speculate, I would have to bet that others are not pricing it into the stock. Google spends over $1bn on Waymo a year. I have no insight into this market


Next, to the notion of Uber reducing car ownership. There have been anecdotes of people forgoing car ownership, but that doesn’t seem to be impacting car purchases yet. Car sales, measured by units, are at all-time highs. It’s slowing, but its because we are selling nearly 17MM cars per year and have been for ~5 years. 

Prices too have marched up since the Great Recession. In December 2018, the average price paid for a car was $37.5k, up from $30K in 2013. If Uber and Lyft are having an impact, it is hard to decipher this from the data.


Indeed, while Uber is growing bookings significantly and reported revenue, their growth rates have slowed dramatically. As shown below, Q1’19 adj. rideshare revenue growth is only +9%.

That is materially different than the +21% for the reported bookings. This is revenue that is adjusted to reflect driver earnings as well as incentive comp. An example is provided below: 

As you can see, the driver pay and incentives matter materially here. “Excess” incentives are defined as “payments, including incentives but excluding Driver Referrals, to a Driver that exceed the cumulative revenue that we recognize from a Driver with no future guarantee of additional revenue.” 

Is this number improving for the Company? Hmmm…

Granted, this does include incentives for UberEats and Rideshare incentives are expected to improve for Q1’18 compared Q1’19, but hard to see that the conditions overall are less competitive.

As an aside, I recently had an Uber driver tell me he was going to buy the Uber IPO (he admitted he didn’t study it much, just knew they were growing). That actually could be an interesting employment hedge… if the drivers are hurting, Uber may be doing well – and vice versa!


There are two players so we should compare what they look like. For starters, Uber is much bigger than Lyft and is global. How has that scale played out on the financials? Still a bit too early to see benefits. It’s clear you can see Uber expanding into other markets, while Lyft is focused on the core. 

Clearly, they both burn cash. This actually surprised me a bit. Before the financials were released, I would have viewed the companies as platforms and apps, or asset-light businesses, whereas all the asset-heavy stuff is left to the drivers. Similar to AirBNB, where the homeowner faces the cost of serving the guest and the platform just takes a fee. 

Clearly, that is not the case. They spend a lot on data centers and other infrastructure (more on cash flow at the bottom of this post

We should compare and contrast the two players as well (feel free to add anything in the comments):

Pros of Uber:

  • Larger scale – ride sharing is 5x the size of Lyft.
  • More diverse business with options – UberEats, UberFreight, autonomous… with the added scale. You could argue Lyft is also entering these, but Uber appears to have the lead
  • Valuation seems less demanding – basing that only on Lyft’s valuation and other travel comps

Cons of Uber:

  • Clearly losing share to Lyft
  • Operates in highly competitive markets – as if ride sharing wasn’t competitive enough, Uber got into UberEats (a zero barrier to entry business, but I get why they did it), and freight brokerage

Pros of Lyft:

  • Singular Focus – nothing other than “transportation-as-a-service”. There is some support of companies that focus on one goal tend to execute on that rather than be stretched in all directions
  • Increasing Share – overthe past 2 years, Lyft’s share has grown from 22% to 39%, taking advantage of Uber’s PR mishaps while also being competitive
  • More Upside in Core Market – Similar to the bullet above, if Lyft continues to take share, it seems clear that it will be at the expense of Uber. Given Lyft is 1/5 the size of Uber, there is plenty of share to give

Cons of Lyft:

  • Smaller company / less scale
  • No “other bets” – Similar to google’s “other bets” segment, Uber benefits from its core delivery business, cross-synergies with UberEats, and other bets.  Lyft has autonomous capability, but its anyone’s guess on who wins the war here.
  • Entering more capital intensive businesses – with the entry into scooters and bikes in scale, it appears Lyft is going to now be reinvesting in that business.  (Funny enough, I saw a piece that said Bird Scooters last less than a month)

Perhaps Uber should trade at a significant premium to Lyft due to scale, global presence, and “Amazon” view of transportation. Jeff Bezos wanted the everything store, Uber will be the transportation store. Conquer all, forget profits in the near term, it is all about the next 10+ years…

At $45/share, that means Uber is valued at $82.4BN while Lyft is valued at $15.7BN at $55/share. That places them both at exactly 7.3x 2018 sales…

Perhaps investors are saying Lyft will grow core earnings faster. Perhaps they like the market share gains. Perhaps they view Uber’s other ventures as dilutive. Maybe there is negative view on autonomous given Otto was caught stealing trade secrets and that put them behind. Either way, I am a bit surprised to see Uber trading for the same price (long UBER / short LYFT anyone?).

I will be passing on both. I just don’t see this as a great market and I think it will be forever competitive. It seems like a race to the bottom for both attempts to gain and retain riders and drivers. Yet, there is nothing binding one to either. Therefore, I don’t see much pricing power here, as noted above.

Interesting Insurance Dynamic Not Discussed Often

One last thing — as I was building the cash flow statement for these companies, I noticed working capital changes were an inflow of cash, largely due to changes in an insurance reserve.

At first, it seems that Uber and Lyft are negative working capital businesses (i.e. the more sales grow, they actually get cash in the door like an insurance company that they can reinvest). That could possibly be a great thing. Lo and behold, I learned Lyft and Uber actually have self-insurance.

In other words, when a driver accepts a rider on Lyft, up until the ride is finished, Lyft is responsible for insuring the trip. This is a huge cost.

In fact, cost of revenue is really made up of two main items: Insurance costs and payment processing charges. Payment processing is the merchant fees that credit cards charge. Insurance costs include estimated losses and allocated lost adjustment expense on claims that occurred in the quarter. It also includes changes to the insurance reserves. These latter two items make up the bulk of COGS.

Lyft says in its S-1 that, “By leveraging our data and technology, we are seeking to reduce cycle times, improve settlement results, provide a better user experience, drive down our cost of claims and have fewer accidents by drivers on our platform.”

Clearly, this would be great. But insurance is also one of the items that can be gamed in the future. By reserving less, Lyft and Uber and report higher earnings. This often happens in good times for banks, where they reserve less for bad loans to boots EPS until a recession hits and they realize they didn’t reserve enough.

Analysts typically are wrong in their expectations, but this could be something where they are especially wrong. If analysts think they can leverage COGS more than reality, the forward estimates people are baking in could be too high.