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Tencent Keeps Soaring Higher Despite China’s Weak Economy

Tencent Keeps Soaring Higher Despite China’s Weak Economy

imagesWhile U.S. social media stocks like Facebook (NASDAQ: FB), Groupon (NASDAQ: GRPN), and Zynga (NASDAQ: ZNGA) have struggled to live up the hype; China’s Tencent Holdings (0700.HK & OTC: TCEHY) on the other hand has been thriving despite a weak Chinese economy.

Who & What is Tencent?

Tencent is a Chinese investment holding company whose subsidiaries provide everything from mass media, entertainment, Internet, gaming and mobile phone services to China’s population of 1.35 billion people. They are China’s largest Internet Company and the 3rd largest tech company in the world, behind Google & Amazon. The Internet has become one of China’s leading industries and as a result an ultra-competitive market as new companies are being established daily as everyone is trying to capitalize off the new trends and growing user base. While many companies have been experiencing growing pains, Tencent has continued to dominate the market thanks to their diversified mix of businesses.

Tencent’s 3 Top Services

  1. QQ, China’s largest instant-messaging service with over 850 million users.
  2. QQ Games, a massive, youth-oriented, multiplayer gaming network.
  3. WeChat, a free mobile social-network that allows users to send photos, videos, and voice messages to their friends, walkie-talkie style.

Tencent is China’s Facebook, Twitter, eBay, Yahoo, Google, Zynga, and Tumblr all rolled into one. What makes Tencent stand out from their competitors is the fact they can offer their users, advertisers, and application developers access to everything from a single platform.

One of the Greatest Growth Stocks of the Past Decade

tencent-pony-ma-1Tencent’s dominance has resulted in their stock more than doubling over the past three years. Tencent has been one of the greatest growth stocks of the decade, appreciating +392% in the past five years along with a ridiculous +7,595.89% since their IPO in 04’. Tencent’s competitors are not experiencing the same success as many are struggling, held back by the uncertainties surrounding the health of the Chinese Economy.

Baidu (NASDAQ: BIDU), one of China’s Internet Giants and a competitor of Tencent, is down over -13% the past year compared to Tencent’s +39% yield over the past year. Same thing happened during 1Q earnings, many Chinese companies fell flat falling short of analyst’s expectations. Tencent on the other hand, reported better than expected 1st Quarter earnings beating analyst expectations sending shares up +31% since April.

Short-Term Expectations, What to Expect in 2013?

Many investors want to know whether Tencent’s great run will ever end? My outlook is this, the 2nd half of 2013 could cause some challenges for Tencent due to volatility in the months ahead. Tencent has seen an overall slowdown in their gaming business, which is expected to continue as long as the Chinese economy continues to struggle. Add to that the fact that Tencent’s two most recent ventures, e-commerce and mobile are not expected to start generating revenue until at least 2014. For most companies, these problems would be a blessing but for Tencent’s ridiculous growth to continue they will need to find a way to supplement the lost revenue through its other services.

Long-Term Expectations, What to Expect Over the Next 5 Years?

tencent_penguin-244x300Tencent’s dominance should grow stronger in the next several years as they plan to capitalize off China’s rapidly growing mobile and ecommerce markets.  If there is one thing Tencent knows how to do, it’s turn their users into profits as seen in their strong 2013 profit margins of 28.93%.

Originally founded as an instant-messaging platform in 1998. Much like Facebook, Tencent grew very quickly recruiting a high volume of new users. Tencent was surprised that having lots of users didn’t automatically translate into profits so the company changed their business model building on their large user base and creating an online-gaming presence. Tencent has since then expanded into many different online services the two most popular are QQ, +850 million users, and WeChat, +300 million users in two years. Tencent’s ability to attract users and in turn profit of them is a major reason analysts are very bullish about Tencent’s long-term prospects.

Tencent’s Huge Opportunity With China’s Growing Mobile Market

Tencent currently trades at a premium valuation, something they’ve earned thanks to their years of dominance. Tencent’s dominance in China’s online market can be attributed to their efficient operations, strong senior management and their ability to continue to release new innovative services. Tencent’s growth can be directly attributed to their efficient and effective investing producing a ROE of 35.38% and ROA of 13.90%. Its numbers like those than show why Tencent’s senior management have been the driving force behind the company’s success. Tencent’s CEO, Ma Huateng, deserves a lot of the credit. A recurring candidate for Barron’s World Best CEO, Huateng is described as very patient and careful executor, often planting seeds and experimenting before jumping in.

This explains why Tencent often takes its time to develop new brands, making sure that the right infrastructure is in place to allow the new venture to truly succeed. Quality control is a huge part of Tencent’s business development strategy.  They always like to make sure that their new brands are fully developed and well tested before they release it to the public. Tencent’s reasoning is that most people will only give an app, game, online service, or new social media platform one shot and if a user experiences any technical difficulties or bugs in the software, the likelihood of them becoming a long-time user greatly diminishes. 

Tencent’s Establishing a Foothold in China’s Growing Mobile Market 

tencent-oThis strategy can be seen with Tencent entering China’s mobile market. Establishing a foothold in China’s growing mobile gaming market is a huge opportunity and one they want to build the right way, not the quick one.

Executives cautioned that it was still early days for e-commerce and mobile gaming, stressing that focusing on the quality of the user experience is the key to long-term success. They also wanted to curb expectations and not let analysts call these ventures a bust for failing to produce profits, when Tencent doesn’t expect them to become a factor in the company’s revenue strategy until at least 2014 maybe 2015. Executives are really excited about the prospects of the company’s shift into mobile gaming saying that they have the right infrastructure in place to link its applications like mobile QQ and Weixin to mobile-gaming, as well as filling the pipeline with “high quality games.”

Mobile gaming is a much larger market than traditional gaming and for Tencent that means it’s a much more lucrative opportunity as well. The differences between the two are that mobile gamers range between ages 18 to 60 versus traditional gamers range between ages 18 to 24. This opens up a whole new group of people that Tencent can market their single platform services to. Over 80% of China’s population of 1.36 billion is expected to be using the Internet by 2025.  Adding to this, it’s reported that Mobile phones have become the top devise for accessing the Internet in China and over 60% of mobile users purchase mobile products on a monthly basis. So as you can see, there is a huge untapped market that Tencent has yet to capitalize from.  Currently gaming makes up half of Tencent’s revenue. If they are successful in tapping into the mobile gaming market then this number should rise substantially.

Tencent’s Strong Long-Term Prospects

Tencent is a well-run company with a solid balance sheet, over HK$25 billion in net cash, and a strong array of popular, revenue producing services. With a current 0.30% dividend, executives have said that they plan to both increase the dividend and continue to buybacks shares to return cash to shareholders.  Investors looking to capitalize on both emerging markets and the technology sector should look no further than Tencent. They are clear the leader in a rapidly growing sector and they hold many great long-term prospects that I believe will allow them to continue to dominate the Chinese market. Continued development of both mobile and ecommerce services will make Tencent the only company that can offer its users and advertisers a single platform to fulfill all their online needs.

Tencent’s 12-Month Price Target

The consensus among analysts is that Tencent will continue to outperform its competitors, as they expect earnings to grow 22% in 2014 to over HK$25 billion (HK$13.55 a share) on HK$95 billion in sales. I also believe Tencent will beat its competitors and as a result I expect Tencent’s stock to continue to rise to $375 over the next 12-months, an annual yield of 25%.

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The Best Apple Christmas Present May Be Its Stock

The Best Apple Christmas Present May Be Its Stock

Screen Shot 2013-04-09 at 5.45.11 PMApple’s stock has taken a beating since reaching all-time highs over $700.  Apple may be down but it’s by no means out.  I believe the stock will finish 2013 with a strong rally somewhere above the $500 mark.  The best Apple present this Christmas may not be an iPad Mini but rather Apple stock.

Analysts are mixed on Apple (AAPL).  Schwab’s Equity Rating is D, Underperform.  Ned Davis is Neutral.  Credit Suisses rates Apple an Outperform.  And the Reuters average rating is Outperform.  So, let’s examine the pro and cons of owning Apple stock.

Apple Cons

Concerns center around pace of innovation, supply problems and structural issues around gross margins.  And, of course, there’s the never-ending grumbling about capital allocation of its $140 billion hoard of cash and whether Apple should issue a dividend.  Many analysts worry Apple cannot sustain its gross margins, which has historically been well above industry competitors.

Other concerns hover around the increased competitive scenario and the fact that Apple no longer enjoys a monopoly.  People are excited about new products from Samsung (SSNLF.PK) which seems determined to continue its onslaught in spite of lawsuit setbacks against Apple.  And let’s not forget new forays into hardware offerings from Google and Facebook.  Apple is very dependent on iPhone for sales — about 70% comes from iPhone.  Plus, Apple has no recurring revenue stream other than iTunes and their revenues are based on what they sell.  We saw this in the 1980s with Sony when Sony was conquering the world of technology innovation.  The world loves Apple.   But people are waiting for a dramatic new product from Apple.  The world owns it.  But haven’t we seen this before with IBM or Cisco?

Apple’s lucrative margins are under attack, forcing it to protect its profits by pressuring its suppliers.  It’s not that Apple is doomed though.  It’s only likely to become less profitable.

Screen Shot 2013-04-09 at 5.44.54 PMApple is going through a transition from a hyper-growth story to a more traditional, high quality branded company.  It grew earnings at +45%+ per year for ten consecutive quarters.  Recently, it has grown earnings a little above 20%.  Apple will have over $200 billion in annual revenue this year.  It’s impossible to keep growing at that rate.  So, it will be a more traditional growth company with a great consumer brand and with great products.

Most of Apple’s cash is offshore – a constraint to returning cash to shareholders in the form of dividends.  Coke trades at a higher multiple than Apple.  People have expectations of growth from Apple that they can’t live up to.

Are Apple’s days of growth over?  Is Apple the new Coke?  Are its days of hyperbolic growth over?  Is Apple now the great new value play?  Or, is it a value trap?

Apple Pros

Apple may well continue a bumpy ride in the near term.  However, Apple’s fundamentals are still fantastic going forward if you take an outlook of more than a quarter or two.  Apple’s second quarter 2013 results are expected to beat expectations.  Credit Suise’s Kulbinder Garcha put an Outperform rating and a price target of $600 on Apple.

New iPhone demand will be strong

Screen Shot 2013-04-09 at 5.44.37 PMWhile 2013 may not have enough new products from Apple to satisfy everyone, the next iPhone will begin production this quarter according to a recent Wall Street Journal report.  Apple is reportedly working on a less expensive version with a plastic case that could be on the market before Christmas.  Regardless of which features are included, the new iPhone will be better than the last one.  The iPhone 5 has sold more than the 4S and Apple sold a record 47.8 million iPhones in the first fiscal quarter of 2013 – up 29% from a year ago.  The first iPhone 4S customers who bought in October, 2011 will be primed for a new phone now that their 2-year contact is about to end.  So, according to Morningstar analyst Brian Collello, the upgrade cycle will likely keep demand strong.  He maintains that the smartphone market is still in the “early-to-middle innings.”

Apple continues to lead in tablets

Apple remains the undisputed leader in the tablet market.  With more iPad and iPad mini models to come, expect tablets to bring in more app revenue for Apple than from smartphones.  iPads are also predicted to show strong sales for the second quarter – an increase of 61% year over year to 19 million units.  iPad minis will account for more than half of that.

Apple Apps remains the heavyweight

Screen Shot 2013-04-09 at 5.44.21 PMiPads are pulling in more revenue from each app than the iPhone, most likely due to higher-priced apps or apps that get more in-app purchases.  It’s also possible that games are playing into this because the iPad’s bigger screen lends itself to more complex games.  According to research by App Annie, app store downloads from iPad users doubled from 100 million in January 2012 to 200 million in January 2013.  More surprising was the amount of revenue the iPads generated from app downloads.  In January 2012, iPad has less than 20% the app downloads of the iPhone, but had nearly 50% the app store revenue.  In January 2013, the gap narrowed with the iPad accounting for 30% less app store revenue than the iPhone.

Canalys issued a report on app downloads at the four major mobile stores:  Apple, Google (GOOG), Microsoft (MSFT) Windows Phone Store and Research in Motion’s (BBRY) BlackBerry World.  Apple’s App Store accounted for the largest share of revenue among the four stores, around 74%.  Google saw the greatest number of downloads (about 51%) with Apple close behind.

Apple trades below intrinsic value

Apple has an attractive valuation and is currently trading well below intrinsic value.  Apple’s revenue growth should continue to be robust in the 20% range and is trading at PE ratio estimated at 9.6 and just 8.38 times next year’s earnings.  Compare that to the S&P 500 PE ratios which Robert Shiller estimates is currently trading at 18.17.

With the shares hovering around $425, there seems to be little downside, especially when you take into account about $100 in net cash per share if Apple were to bring all the overseas cash back and pay U.S. taxes on it.  Apple’s capital allocation is a continuing source of speculation.  With an estimated $140 billion in cash hoard – 75% of which is trapped overseas – a buy back would be viewed very positively.

Other pros for Apple include a potential China upside that has not yet played out, strong cash flow and the “leveragability” of iTunes.

My Take  

If you missed the opportunity to buy Apple before, take a hard look now.   There is little downside at $425.  Even if there is no big new product announcement, iPhones and iPads continue to sell well.  Apple is a well-managed, cash-rich company that’s proven it can juggle the profit margin pressures inherent with the transition to new, lower-priced product innovations.  While Apple may not climb back to it’s record-high levels, I expect it to hit somewhere north of the $500 mark by Christmas.

Smart investors will continue to profit from Apple and might be wise to consider putting Apple stock in their Christmas stockings rather than just another iPhone or iPad upgrade.  Awesome Stock.  Awesome Products.  Awesome Potential.

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Does Yelp Need Help? Is Yelp A Thorn in Apple’s side?

Does Yelp Need Help? Is Yelp A Thorn in Apple’s side?

Yelp continues to struggle.  Since Stocks on Wall Street first took a negative view on Yelp (NYSE: YELP) in our June 25, 2012 article titled “Why Yelp Is Not A Good Investment: 3 Reasons to Sell the Stock Now”, the stock has tumbled 21.59%.

(Above is a chart of Yelp’s performance since June 25th, 2012)

The three reasons we cited were:

1) Yelp’s flawed business model, with high cost of sales and no clear path to profitability;

2) End of their lockup.  Lockups also plagued other social media plays, Zynga (NASDAQ: ZNGA and Groupon (NYSE: GRPN);

3) Yelp did not fit two key criteria in Stocks on Wall Street’s Rules of Investing: (a) Buy best-of-breed companies and (b) Buy damaged stocks, not damaged companies.  We consider Yelp a damaged company and it is certainly not a best-of-breed stock.

Yelp was heralded as a social media darling earlier this year as shares rocketed up over 60% since their March 2012 IPO.  Market pundits initially touted YELP as a better investment than social media plays, Groupon or Zynga.  However, after a roller coaster summer, Yelp peaked at $28.89 on October 4, 2012, then plummeted 40%.

 (Above is a chart of Yelp’s performance since October 4th, 2012)

Why is Yelp Struggling? 

First, there is widespread concern about Yelp’s ad revenue, or lack thereof.  Third-quarter earnings beat analyst estimates and revealed that sales rose 63% to $36.4 million.  However, fourth-quarter guidance did not meet expectations.  Yelp forecast next quarter’s revenue at $40-$40.5 million amid lagging ad sales – just short of Bloomberg’s average analyst estimates of $40.8 million.  Shares fell almost 11%, reversing the stock’s upward trend.  Yelp’s Chief Financial Officer, Robert Krolik, reported fourth-quarter revenue from display ads would be “flat-to-down” because of “execution challenges in that part of the business.”

Mobile advertising is another looming challenge.  Yelp has also been a laggard at generating mobile advertising revenue, particularly as users increasingly turn to mobile devices for access to social media.  Yelp’s mobile app generated no revenue in the last quarter.

Yelp’s integration into Apple Maps has become further cause for concern.  Apple’s (NASDAQ: AAPL) vulnerability with its problematic map application is undeniable.  All too often, directions are wrong or location data is missing.  Apple’s CEO, Tim Cook, has apologized for the Apple Map’s inadequacies.

It’s increasingly apparent that Yelp’s flaws contribute to Apple Maps’ flaws.  Yelp’s user-sourced business information is leading Apple Map users astray.  Apple needs to work more proactively with Yelp for more accurate business listings and review if they hope to fix Maps.

Anyone with a Yelp account can add or influence venue data. This may range from the business’s location to its operational hours – all without independent verification by the business in question.  By comparison, Google (NASDAQ: GOOG) requires business owners to confirm their location.  Google Maps employs a method known as crowdsourcing.

According GigaOM, Yelp’s user-based approach results in “multiple venues entered, prospective businesses that add data but never open, and businesses that are closed but never get removed from Yelp.”  GigaOM cites a very telling example involving a Napa Auto Parts location.  A search of Apple’s Maps found one Napa Auto Parts store in a small California city that had 13 reviews from Yelp users.  However, Apple Maps showed that particular location as a pizzeria and there was no mention of Napa Auto Parts,

Yelp’s approach with hidden reviews and out-of-date businesses will continue to degrade search results and more customer use or map quality improvements wont fix that problem.

Here’s why Yelp’s method of curating posts presents a further problem to Apple Maps.  Yelp favors ‘elite’ user reviews over reviews by regular users.  Elites are specifically selected for their seemingly authentic reviews and profile information.  This means the primary reviews seen by searchers are hand picked by Yelp.  When using a full browser, the filters can be circumnavigated and other reviews by regular users can also be accessed.  But Yelp’s mobile application and Apple Maps do not allow those filtered reviews to be seen.  As a result, much information is missing.  This is likely to become a bigger problem for Yelp, especially if Apple decides to terminate their contract and look for better, more accurate alternatives.

Stocks on Wall Street continues to believe there are just too many negatives outweighing the positives for Yelp.  If you’re a current shareholder, sell on a bounce.  With or without Apple Maps, Stocks on Wall Street remains bearish on Yelp.

 Where Does Yelp Go From Here?  

Analysts continue to lower price estimates and downgrade Yelp.  Nine analysts recently issued a ‘HOLD’ rating, up from five ‘HOLD’ analysts just three months ago.  82% of analysts covering Yelp now have a HOLD rating on the stock.  Investors have cause to be concerned about Yelp’s business model and ad revenue growth and its mobile advertising strategy.  Stocks on Wall Street reiterates its negative view on Yelp.

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Bruce Willis, Apple & Ecosystem Mania

Bruce Willis, Apple & Ecosystem Mania

An unfounded rumor surfaced recently in the British tabloid press that Bruce Willis was suing Apple because it wouldn’t let him leave his iTunes collection to his kids. The rumor is groundless.  But it does highlight what I like to call Apple’s ecosystem mania.

Most tech experts agree Apple’s ecosystem is key to its success.  Now that Apple (NASDAQ: AAPL) can no longer count on building market share by offering better and unique gadgets, it must do all it can to lock customers in to the Apple ecosystem.  Its rush to push an inferior maps app onto customers underscores Apple’s increasing obsession with its ecosystem strategy.

Microsoft has reaped huge benefits from its Windows ecosystem for years.  And Windows still enjoys stickiness in the PC world.  Their recent effort to force Windows 8 onto skeptical consumers is simply a continuation of that eco-strategy.

Others argue that the real ecosystem battle is between Google and Amazon.  Google probably has the most robust ecosystem with its search, gmail, calendar, maps, YouTube, etc. – all under the Google+ social layer.  And Amazon is in the process of building what may be the most complete cloud ecosystem for business.

But many consumers don’t want to limit their digital lives to just one ecosystem.  Consider the trend that forced corporations to support iPads and iPhones that employees bring to work.  Samsung continues to build market share with innovative new products.  Then there’s the cloud.  And the cloud cries out for a universal platform rather than any collection of proprietary systems.  Ultimately, consumers really want their digital world to work across various platforms.

Apple probably has the strongest and most addictive ecosystem of all.  It is still further ahead in its ability to capture and keep users than any of its competitors.  They know that the higher the number of devices owned within the Apple family, the higher the probability that the next purchased device will be an Apple.  So, look for Apple to expand its offerings into TV, cloud-based software, office suites and social networking.

Apple has a decade of dominance with iTunes and iPod, almost two years of 70% market share for the iPad, and 25 straight quarters of beating the growth rate of the rest of the industry in PC sales.  The company will have over $200 billion in annual revenue next year.  While it’s impossible to keep growing at the same rate, Apple is a great consumer brand with great products.

It may be a bumpy ride over the next couple of months but, in spite of the recent dive in its stock price, Apple’s fundamentals and long-term outlook are still fantastic.  There is compelling evidence that the breadth, strength and addictive nature of Apple’s ecosystem mania will continue to keep the company a step ahead of its competitors.

As for Bruce Willis and his iTunes collection, why on earth would his kids ever even want his iTunes collection in a world with Spotify and Pandora?

Don’t be a stranger leave a comment below and let me know what you think or send them to my Twitter. Also remember to sign up for Stocks on Wall Street’s Monthly Newsletter.

Is Yelp a Thorn in Apple’s Side?

Is Yelp a Thorn in Apple’s Side?

Yelp’s integration into Apple Maps demands more investor scrutiny.

Yelp’s (NYSE: YELP) deal with Apple Maps was heralded as big news for investors just a few months ago.  It has since become a further cause for concern for Yelp’s struggling stock.

Apple’s (NASDAQ: AAPL) vulnerability with its problematic map application is undeniable.  All too often, directions are wrong or location data is missing.  Apple’s CEO, Tim Cook, has apologized for the Apple Map’s inadequacies.

It’s increasingly apparent that Yelp’s flaws contribute to Apple Maps’ flaws.  Yelp’s user-sourced business information is leading Apple Map users astray. Apple needs to work more proactively with Yelp for more accurate business listings and review if they hope to fix Maps.

Anyone with a Yelp account can add or influence venue data. This may range from the business’s location to its operational hours – all without independent verification by the business in question.  By comparison, Google (NASDAQ: GOOG) requires business owners to confirm their location.  Google Maps employs a method known as crowdsourcing.

According GigaOM, Yelp’s user-based approach results in “multiple venues entered, prospective businesses that add data but never open, and businesses that are closed but never get removed from Yelp.”  GigaOM cites a very telling example involving a Napa Auto Parts location.  A search of Apple’s Maps found one Napa Auto Parts store in a small California city that had 13 reviews from Yelp users.  However, Apple Maps showed that particular location as a pizzeria and there was no mention of Napa Auto Parts,

Yelp’s approach with hidden reviews and out-of-date businesses will continue to degrade search results and more customer use or map quality improvements wont fix that problem.

Here’s why Yelp’s method of curating posts presents a further problem to Apple Maps.  Yelp favors ‘elite’ user reviews over reviews by regular users.  Elites are specifically selected for their seemingly authentic reviews and profile information.  This means the primary reviews seen by searchers are hand picked by Yelp.  When using a full browser, the filters can be circumnavigated and other reviews by regular users can also be accessed.  But Yelp’s mobile application and Apple Maps do not allow those filtered reviews to be seen.  As a result, much information is missing.  This is likely to become a bigger problem for Yelp, especially if Apple decides to terminate their contract and look for better, more accurate alternatives.

We still see too many negatives outweighing the positives for Yelp.  Refer to our recent overview of Yelp, “Does Yelp Need Help”.  We continue to urge investors to avoid Yelp.  If you’re a current shareholder, sell on a bounce.  With or without Apple Maps, Stocks on Wall Street remains bearish on Yelp.

Don’t be a stranger leave a comment below and let me know what you think or send them to my Twitter. Also remember to sign up for Stocks on Wall Street’s Monthly Newsletter.

Does Yelp Need Help?

Does Yelp Need Help?

Yelp continues to struggle and has performed as we predicted back in June.

Yelp (NYSE: YELP) was heralded as a social media darling and shares had been up over 60% since their March 2012 IPO.  Yelp appeared to be performing better than other social media plays such as Groupon and Zynga.  After a roller coaster summer, Yelp peaked on October 4, 2012 at $28.89.  However, it has since plummeted over 40%.

(Above is a chart of Yelp’s performance since October 4th, 2012)

Stocks on Wall Street advised readers to SELL and/or not buy Yelp in our June 25, 2012 article titled “Why Yelp Is Not A Good Investment: 3 Reasons To Sell The Stock Now”.  Since then shares are down 21.59%. We cited three reasons for our negative position on Yelp:

1) Flawed business model

2) End of their lockup.  Lockups also plagued other social media stocks such as Zynga (NASDAQ: ZNGA and Groupon (NYSE: GRPN)

3) Yelp does not fit two key criteria in Stocks on Wall Street’s Rules of Investing:  (a) buy best-of-breed companies and (b) buy damaged stocks, not damaged companies.  We consider Yelp a damaged company and it is certainly not a best-of-breed stock.

(Above is a chart of Yelp’s performance since June 25th, 2012)

Why is Yelp struggling?  The first major concern for investors has been Yelp’s advertising revenue, or lack thereof.  Third-quarter earnings beat analyst estimates and revealed that sales rose 63% to $36.4 million.  However, fourth-quarter guidance did not meet expectations.  Amid lagging ad sales, Yelp forecast next quarter’s revenue at $40-$40.5 million.  Bloomberg’s average analyst estimates were $40.8 million.  Shares fell almost 11%, reversing the stock’s upward trend.  Yelp’s Chief Financial Officer, Robert Krolik, reported fourth-quarter revenue from display ads would be “flat-to-down” because of “execution challenges in that part of the business.”

Mobile advertising is another looming challenge for Yelp.  Their mobile app generated no revenue in the last quarter.  This slow move into mobile ad revenue is cause for investor concern, particularly as users increasingly turn to mobile devices for access to social media sites.

Where does Yelp go from here?  Analysts continue to lower price estimates and downgrade Yelp.  Nine analysts recently issued a ‘HOLD’ rating, up from five ‘HOLD’ analysts just three months ago.  82% of analysts covering Yelp now have a HOLD rating on the stock.  Investors have cause to be concerned about Yelp’s business model and ad revenue growth and its mobile advertising strategy.  Stocks on Wall Street reiterates its negative view on Yelp.

Don’t be a stranger leave a comment below and let me know what you think or send them to my Twitter. Also remember to sign up for Stocks on Wall Street’s Monthly Newsletter.

Twitter’s IPO is at Least a Year Away

Twitter’s IPO is at Least a Year Away

Yesterday we asked the most popular question, “Will We Ever See a Twitter IPO?” Well thanks to Fox Business Network’s Charlie Gasparino we have more insight on the situation and he reports that Twitter’s IPO is at least a year away.

 

 

We screwed up our IPO because we wanted to screw Wall Street.

That’s the explanation recently delivered by Facebook (NASDAQ: FB) chief operating officer Sheryl Sandberg to at least one prominent institutional investor about how the social media network so badly misjudged investor demand and flubbed its much-hyped initial public offering in May.

Shares of Facebook have declined more than 50% from its IPO high, and company officials have recently launched a charm offensive with large institutional investors to try and entice them back into the stock amid growing market discontent about the company’s future prospects, and the ability of management, particularly the company’s 20-something CEO Mark Zuckerberg, to deliver future earnings growth.

The flubbed deal has had far-reaching implications, making already skittish small investors even more hesitant to jump into the stock market.

In addition, FOX Business has learned that Facebook competitor Twitter is reevaluating the timing for a possible IPO following Facebook’s problems. A person with knowledge of  Twitter’s plans says any IPO could be a year away, as senior management determines how best to deliver earnings as a public company. Company founder Jack Dorsey is working with JPMorgan (JPM) CEO Jamie Dimon on Twitter’s future, this person says.

A spokesman for Twitter had no comment. A JPMorgan spokesman also had no comment.

Sandberg, 42, has been widely regarded on Wall Street as Facebook’s “adult in the room” largely for the decade she spent as a senior executive at tech giant Google. But some of her recent remarks about Facebook’s ill-fated IPO have large investors and Wall Street analysts questioning her abilities as well.

Sandberg told a large institutional investor at one recent meeting that the firm decided to price the IPO at $38 a share—in what underwriters believed at the time was a steep price—not just to get the most possible money out of the deal, but also to avoid Wall Street traders from “flipping” the stock, meaning they would buy shares at the opening price and sell them sometime later at a profit when shares start to rise amid additional investor demand.

Sandberg said the company was seeking long-term investors who believe in Facebook’s future, this person said.

But when the investor questioned her on why the company allowed insiders and venture capitalist financiers to immediately trade out of the stock, she explained that was part of Facebook’s “culture,” according to one person with direct knowledge of the conversation.

“Sandberg basically said that Facebook is a Silicon Valley company that doesn’t want to make Wall Street traders rich, but has no problem making the people in Silicon Valley wealthy,” this person said.

Recently, Facebook has faced criticism for allowing venture capitalists, such as early Facebook backer Peter Thiel to sell nearly his entire stake just a few months after the IPO. Other companies demand that investors abide by far longer “lock up period” where they have to hold onto shares for a longer period of time.

Through a spokesman, Sandberg had no comment.

One of the problems with Sandberg’s explanation is that the firm and its underwriters at Morgan Stanley misjudged the appetite for shares among institutional investors who would normally hold the stock. Many institutional investors balked at the initial pricing, which is why underwriters pushed so many small investors into the deal.

Meanwhile, Wall Street traders still enjoyed a decent payday on the IPO when it spiked from its $38 IPO price to $45 in initial trading. Many sophisticated traders sold the stock when it hit around $40 a share.

Many small “retail” investors, however, bought the stock when it was near its highs. Unlike large institutions, these investors were not briefed about the company’s projections of deteriorating revenue and profit growth in the days prior to the IPO.

Small investors also experienced more difficulty buying shares and selling shares because of a technology glitch on the Nasdaq stock market, where the IPO was sold.

“Flipping a stock that goes up is just part of the business,” said Michael Pachter an analyst at Wedbush Securities. Pachter said the stock is down for the simple reason that Zuckerberg, Sandberg and senior Facebook management  “just misjudged demand.”

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Will We Ever See a Twitter IPO? Stocks on Wall Street Wants to Hear Your Answer!

Will We Ever See a Twitter IPO? Stocks on Wall Street Wants to Hear Your Answer!

Twitter is the new cool thing. The social media service is blowing up as trending has become the new cool thing. Twitter’s easily surpassing Facebook in popularity and has been more successful in generating profit from mobile devices, which everyone agrees is the future for online social media services. In fact, Twitter out earns Facebook 3-1 on mobile devices which leads many people to expect that Twitter will be more successful down the road than Facebook who we all know is having their own problems after the IPO crisis. Nevertheless, this has brought up an interesting question surrounding the much popular social media service, Twitter. Will they potentially ever have an IPO or do they not want to make the same mistakes Facebook did? As a result, this prompted us to raise the question on our Facebook Fan Page:

Stocks on Wall Street’s Question of the Day Is:

Do You Think We’ll Ever See a Twitter IPO?

So far the results are:  70% Yes 30% No

We would love to hear your answers, simply follow the link below & go to Stocks on Wall Street’s Facebook Fan Page to vote! Also weigh in by sending us a Tweet, commenting on our Facebook Fan Page discussion, or by leaving a comment below! 

Silicon Valley’s Stock Funk: The Failing Social Media IPOs

Silicon Valley’s Stock Funk: The Failing Social Media IPOs

Historically it has been often told that fall is always a great time for technology stocks to reap the big gains investors love to see. When comparing to Silicon Valley’s top social media plays however this theory has far been true. Except for LinkedIn (NYSE: LNKD) and Yelp (NYSE: YELP) who are up 197% and 152% respectively the rest of the group is performing sub-par to say the least, as you can see in the chart below.

The Four Struggling Silicon Valley Social Media Plays

Facebook (NASDAQ: FB) has been the big headliner since the beginning being one of the biggest disappointments of all-time, as despite having now 1 billion users the stock has fallen flat ever since the IPO, down 45% so far.

Zynga (NASDAQ: ZNGA) a heavy play on Facebook as they operate all the gaming apps and generate lots of Facebook’s revenue are struggling dearly down 79%.

Groupon (NASDAQ: GRPN) the online coupon website started off strong but have seen their best days behind them as they have struggled recently down 77%.

Pandora (NYSE: P) the popular free online music website who due to huge licensing fees has struggled as well down 41%.

What the future holds for all these companies is still up in the air but as of right now the four on the bottom need to seriously reanalyze their companies from top to bottom and start following in line with LinkedIn and Yelp and ask them what they’re doing so they can get back on track or else they might just disappear forever.

Silicon Valley’s Stock Funk 

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Beware of the Five-Year Hangover as Hewlett Packard (HPQ) Isn’t Doing Well After Their Tech-Tonic Slide

Beware of the Five-Year Hangover as Hewlett Packard (HPQ) Isn’t Doing Well After Their Tech-Tonic Slide

Hewlett-Lackard Co. (NYSE: HPQ) debt is the riskiest in a decade relative to Dell Inc. (NASDAQ: DELL) as Chief Executive Officer Meg Whitman struggles to transform the world’s largest computer maker in an age of tablets and smartphones.

Hewlett-Packard is suffering from falling sales of computers and printers and a debt load that’s climbed above the industry average this year. A “deteriorating outlook” kept the company from using savings to fund investment in businesses such as security, according to an analyst presentation.“It appears that the CDS market is expecting Hewlett- Packard’s performance to deteriorate further,” Joel Levington, managing director for corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail. “There is substantial investor skepticism around HP’s ability to turn around the business units.”

Hewlett-Packard, whose market value has dropped by more than $15 billion since Whitman assumed the helm a year ago, now trades at 0.24 times revenue, lower than all global competitors with market values bigger than $5 billion. Overall it doesn’t look good for HPQ in the near future. For deeper analysis, we have five great articles below to help give you more details on HPQ’s troubles and a better long-term outlook.

Hewlett Packard Reels from Tech-tonic Slide (Heard on the Street)

This Just In: H-P Isn’t Doing Well (Jeff Matthews)

Repeat the Technicals: How to Avoid the Next H-P (Josh Brown

HP Debt at Riskiest Level to Dell in Decade: Corporate Finance (Bloomberg)

HP: Beware of the Five-Year Hangover (The Street)

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Barron’s Cover Story: Downgrades Facebook, Says It’s Worth $15

Barron’s Cover Story: Downgrades Facebook, Says It’s Worth $15

Anyone who follows Stocks on Wall Street knows that since the IPO we been a bear about Facebook and it’s long-term outlook advising investors to stay away. Now we’re not alone as in Barron’s controversial recent Cover Story they downgraded Facebook (NASDAQ: FB) significantly saying the company is worth $15 per share meaning that they project the stock to fall another $6.79 or a 43%. This cover story alone hit Facebook hard as investors have become cold feet in the stock once again as shares fell 9% today much can be attributed to the negative attention brought to the company by this cover story.

Our disdain for Facebook’s valuation is no longer an outlier perspective. When the cover of Barron’s values Facebook at $15 per share it means that there are significant troubles with the company’s current business/revenue model along with poor long-term outlook. This has been one of the most controversial stocks of 2012 as investors are often split on declaring what is the bottom for Facebook with optimistic investors thinking that shares are cheap right now and in the long-term will pay off. Clearly Barron’s doesn’t believe we have come near the bottom hence the cover story they published today. Expect shares to continue to decline as investors lose confidence in the stock. We would recommend you stay far away from Facebook as it’s a risky play and we side with Barron’s in the fact that we think shares still have a far ways to fall.

To read Barron’s article click on the link: Facebook is Worth $15 

Comparing Facebook to Apple and Google

Above is an interesting table courtesy of Barry Riholtz and the Washington Post along with two great articles: Facebook’s IPO: What it Means to You and Less Than Meets the Eye at Facebook. Plus below are Stocks on Wall Street’s past articles on Facebook:

Facebook’s Poor Performance Continues as the Stock Hits Record Lows

Who Would Have Thought, Facebook is the Worst-Performing IPO in the Past Decade?

Jim Cramer Flip Flops Again, This Time De-Friending Facebook After Urging Investors it Was a Great Buy

Facebook’s IPO By the Numbers: How Does it Stack Up Against Other Companies Big First Day

10 Stocks Poised to Prosper From Facebook’s IPO: 1-5

10 Stocks Poised to Prosper From Facebook’s IPO: 6-10

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Mobile Money: Facebook Advertising

Mobile Money: Facebook Advertising

Mark Zuckenburg says he can revolutionize the way Facebook is used on hand held devices and monetize it effectively but he has yet to do so, only time will tell. In the meantime, we have a great info-graphic for you below called Mobile Money: Facebook Advertising!

Facebook Ads Infographic

Source: OnlineMBA.com

Facebook Ads Infographic

Source: OnlineMBA.com