Why I sold Ecoya
After attending the Ecoya AGM in Auckland a week or so ago, I decided to sell almost all of my Ecoya shares. Here’s why:
I bought Ecoya at 68c, and they are now $1.10-$1.30 (I sold them over a bit). But after attending the AGM it appeared quite clear to me that the original reason for buying, essentially the marketing expertise of Geoff Ross and his team, was no longer valid.
There was no CEO at the meeting, although subsequently the COO Stephen Sinclair was named CEO.
Ultimately, my investment thesis was based on the understanding that Ecoya would be the Business Bakery (and Geoff Ross’s) main focus going forward. This no longer appears to be the case, particularly with the Moa IPO. There was also talk of more acquisitions which is something that makes me nervous.
In such a highly competitive market, it seems Ecoya has lost its only potential edge. Note, that this is not investment advice, so burn your own pots of money! 
A review of TelstraClear WarpSpeed internet
A month or so ago, I upgraded our internet to the top TelstraClear plan, WarpSpeed. Telstra claim an excellent 25mbps download speed, faster than a hot buttered cat on a hot barbecue. Thats pretty fast.
However, given my previous experience with Telstras lightspeed plan, I was a little… skeptical. LightSpeed was significantly slower than the actual speed of light (299 792 km / s), and most of the time could have been passed by a granny in a mobility scooter. Going uphill. LightSpeed truly stank. Repeated phone calls to Telstra resulted in… nothing. Promises of improvements, and no changes.
Being somewhat a sucker for punishment, I decided to try the WarpSpeed plan, the fastest on the Telstra block. A few repeated calls to Telstra got things sorted, and I sat back, buckled my seat-belt and…
Its faster. Much faster than LightSpeed. LightSpeed (in case I haven’t made the point) sucked. But, since LightSpeed claimed 15mbps, and generally delivered about 2mbps, how does WarpSpeed compare to its claims?
After about a month of usage, and various speedtests via speedtest.net, I have some definitive data. TelstraClear need to update their advertising, and put a maximum speed on their WarpSpeed plan of…. 15mbps!
So 40% slower than advertised. 40% is a LOT. Thats like a car claiming to have a top-speed of 150km/h actually only going 90km/h.
That has to be false advertising somewhere. Does the Commerce Commission care? But 15mbps is a lot better than 2mbps on the LightSpeed plan so thats a positive.
Note: The speedtest.net tests were done to the closest server by ping (generally christchurch). The actual download speeds were between 2.08mbps! and 15.23mbps. Nothing over that, with an average probably around 10mbps.
Update #1: I tried this afternoon (Saturday at 1:30PM) and achieved 19Mbps. My guess is everyone is at the sevens…
Update #2 (4/2/2012): I had a call from Dion at TelstraClear who left me a lovely message about how Telstra stuffed up the provisioning and my account should now be at the 25mbps speed I’m paying for… It is better, some times, I’ve actually hit 20mbps on occasion. Right now, 10mbps, but tests have put it in the 10-18mbps on average… so much better, only about 20%-50% under advertised speeds. Is that good?
Update #3 (22/5/2012): A solid 10mbps tonight!
keyring is closed…
Hi guys, am getting a few posts about keyring.co.nz, the cool wellington sun exposure website I developed a while back. Basically works out whether your house gets sun based on terrain and time of the year. It was very cool, and got me through some patches where I was so bored I died (thanks to working at a bank).
Unfortunately, it was pretty resource intensive, and cost a bit to run. Servers are not hugely expensive, but it adds up over the years. And keyring was always a niche sort of product. And my first go at a standalone startup. Maybe I got the pricing wrong, but hardly anyone bought a report. Lots of people used the site, but not much in the way of money was generated.
So we’ve taken keyring down. The end. Which is a bit sad, because I thought keyring was super-cool, but you have to be pragmatic about these things!
Thanks to everyone who used it and sent me messages. Really do appreciate it! Now, busy working on http://www.peoplemine.co.nz, the bestest customer intelligence platform ever. Big business tools for little businesses.
Greg
Climate change update
Remember how Climategate was all the rage in the media in 2009. All the anti-climate change zealots grabs on to this like a drowning person grabs on to a life-preserver. The media was publishing all the news about the scandal and everyone was split into 2 camps, the climate change believers, and the non-believers.
It was an outrage. To be fair, both sides were relying on faith. The believers, on faith in the scientific system, and the non-believers on faith in… um… bloggers and um… well, hmm. Bloggers I guess. Which is a bit odd but anyhow. The advantage of believing in the scientific system of course is that we’re surrounded by evidence of its effectiveness. The big flaw in the non-believers argument of course is the “absence of evidence does not constitute evidence of absence”.
So I was wondering the other day, what was the result of all the outrage and pontification and grandstanding and accusal of betrayal and lying and falsifying data? For such an enormous scandal that rocked the scientific world, I seemed to have missed somewhat the results.
To summarise from Wikipedia (you might have to take this on faith!), basically there were a few methodological issues, and the CRU (the climate unit at the centre of the scandal) needed to be a bit more up-front and release data quicker. But essentially, nothing was found to be wrong and nothing was found to be faked. The chief guy who resigned was re-instated. And the vast majority of scientists support the concept that climate-change is being bought about by humans.
But given that there was weeks of media coverage and commentary saying how bad the scandal was, how come there was not weeks of coverage saying how everything is fine, and the scandal was a gross-misrepresentation by misguided people? And, maybe an apology for the weeks of coverage of a bunch of rubbish? And how come all the climate change nay-sayers didn’t go… oops. Yeah, guess we got that wrong.
But no, no such luck. At its heart, the scientific system is about a bunch of humans trying to out-do each other. A bit like the competition for places in the All Blacks squad. Its not perfect, since humans are uniquely flawed, but it is, on its evidence, the best and most effective system we have. Its a difficult position being a climate-change un-believer, because on one hand, you are using all of the results of hundreds of years of the scientific system. But then the scientific system says “oh yeah, you know the global warming thing. We’re doing that…”. And you go, “ah… well, the scientific system is a bunch of frauds, and we don’t believe anything they say…”, while turning on the scientific air-conditioner in your scientific car, driving down a chemically based road, munching on your scientifically produced big-mac… thats an awful lot of hypocrisy for one person!
Alasdair Thompson
So Alasdair Thompson put his foot in it. According to the NZ Herald, he said:
In a debate on gender pay equity, Mr Thompson said women deserved to be paid according to their productivity, just like men, and backed equal opportunity.But he said that among many factors affecting work, women could be more likely to put their careers on hold while having children and take more sick leave. He suggested once-a-month “sick problems” could be behind the days off.
The comments about the “once-a-month sick problems” seemed to have created the most outrage. A multitude of comments, from both sexes, generally decrying the comments seem to be the outcome. Which is understandable. I haven’t seen any evidence in my dealings with working with women, and even if there were, they would be impossible to separate from my “take time off to watch the football” days, which I doubt many women do.
But the problem is much worse in my opinion. It goes much further than a simple gender debate about pay equity.
Here’s a quick quiz to illustrate (try and answer honestly based on your gut feeling):
- Person A works 40 hours a week at job XYZ. Person B works 35 hours a week at job XYZ. Should Person A get paid more?
- Person A works 40 hours a week at job XYZ. Person B also works 40 hours a week at job XYZ. Should they get paid the same?
Ah, the ol’ trick question survey!
Did you answer yes to both? Or did you go “this has got to be a trick”!
Ok, heres the same questions, with a twist:
- Person A works 40 hours a week at job XYZ. Person B works 35 hours a week at job XYZ. Person B has been the top producer at the company for several years. Should Person A get paid more?
- Person A works 40 hours a week at job XYZ. Person B also works 40 hours a week at job XYZ. Person A is a stand-out employee, highly productive and crucial to the companies success. Should they get paid the same?
The only difference is that the second survey actually includes a concept of productivity. The real problem, is that Alasdair Thompson and, judging by the comments I’ve seen, and my own experience, still equate productivity with hours spent at work. In my opinion, this is the attitude that needs to be tossed out. We should be outraged that people who are differently productive are treated the same.
But measuring productivity is hard, and probably even more controversial than gender pay differences. And so NZ continues to meander down the productivity stakes…
Natureshop
So this internet thingee huh? Seems kinda cool. Quite like it actually.
One thing I find a bit funny sometimes is how big chains put their shops online. And make it all pretty and so on, and then go “man, internet is super cool. We don’t even need many people to run our online shop. We’re going to make squillions!”. (Squillions is a technical term used when people simultaneously get really excited and try and count both money and numbers of cars/girls(boys)/houses/boats/bling they think they will get because of said squillions. I haven’t researched in depth but my feeling is there is a definite inverse correlation between use of the word ‘squillions’ and actually obtaining aforementioned bling.
And then these shops makes sure that everything costs the consumer significantly more than what it would cost them in the shops themselves, normally due to massive ‘postage’ fees. In fact, some of these online shops charge so much in shipping that I fully expect it to be hand-delivered by Barack Obama and Jesus, hand in hand, singing “Can’t Buy Me Love”…
How do they not get the internet so badly? Amazon got it, everything cheaper. And easier. And a cool online shop in NZ does a similar thing. www.natureshop.co.nz sells icebreaker stuff. To be honest, they sell heaps more than icebreaker stuff, but I get so misty eyed over girding my loins in cast-off sheep hair, I haven’t looked at much else. I even have icebreaker pants. Which I thought sounded kinda naff, but… sigh… they’re great.
So they have cool stuff. But… they get the internet. Their sales are great, and shipping is free. And overnight. And returns are free. And customer service is awesome, just drop them an email. And you don’t have to create another !*$#& *#*! account if you don’t want to.
Now sure, being wizened old cynics like we are, we say “They might say shipping is free, but we’re paying for it somehow!”. And of course, wizened old cynics know a thing or two. I mean, we’ve been there before. And done that. And that other thing.But the prices are the same as in the retail shops (go for the specials page). And you get packages delivered to your door. And you get to unwrap them.
Thats the way internet shopping should be. Let me know if any other online shops do a good job of the internet. Disclaimer, I’ve spent quite a bit of money at natureshop, but get nothing for writing this. Dammit.
this is cool!
http://www.fastcodesign.com/1663750/worlds-prettiest-radiator-made-of-quantum-glass-is-3640
Mac versus PC (or apple versus dell)
A quick one here since I was curiously (enviously) looking at the new macbook pros.
I just did a quick comparison of the price of a reasonably fully specced macbook pro, and a maxxed out dell alienware, and a more standard dell XPS 15 on their respective US websites, and the comparison was interesting:
| Alienware | Apple | XPS 15 | |
| CPU | CPU:2.13ghz quad core i7 | 2.2ghz i7 (win) | 2.2ghz i7 |
| Screen res | 1600×900 | 1680×1050 | 1920×1080 |
| Memory | 4gb | 4gb | 4gb |
| HDD | 500gb Sata 2 7200rpm | 500gb Sata 7200 | 500gb Sata 7200 |
| Vid Card | ati radeon 5730(1gb) | ati 6750m(1gb) and onboard (win) | nvidia 525m(1gb) |
| Cost | $2524US | $2349US | 1480US |
So, the macbook is cheaper than the alienware. But the XPS 15 is much cheaper than both.
From what I understand, the macbook is 1/2kg lighter than the XPS15, which is intended much more as a desktop replacement than an actual portable. But anyway, if you’re buying a macbook, you need to justify another $1000US.
That wouldn’t be too much of an issue for me I don’t think, since $1000US is probably about 1c per hour I spend on my mac. I’ve never been happier with a laptop than my mac (owned dells and toshibas previously) and I find it stupidly productive. The OS is worth probably another say $500 to me, because I like unix, and the level of ‘proper’! software support, and weight is pretty important as well. And the simple magnetic power cord has saved my ass more than … a lot, because I like to leave my mac dangling on the edge of tables, tipping precariously with the power cord rigged as a trip wire to trap the unwary. Most often me.
But there you have it, a mac versus dell comparison!
Disclaimer, happy (mostly) macbook user, and apple stockholder.
Ecoya update
Ecoya have just released a news item, saying, unsurprisingly for a marketing company, just how fantastically they are doing. Or, since they’re a startup, how fantastically they’re losing money.
They’re predicting a loss of around 4 million, and, as predicted, have needed to raise more money. They state
“Taking into account current banking facilities, the company does not expect to have a requirement for further capital raising based on current forecasts.”
Which means that they had to go cap-in-hand to the bank and ask for money to pay the bills. But, they didn’t have to go out to the market to ask for more money to pay the bills. Yay. Smelly bankers instead of the unwashed masses like me. So no surprises there. The rest of the announcement is typical marketing/startup positivity, which is summarised as: “yay, we’re fabulous, blah, we *should* get more fabulous and wealthy if the planets align, yay us, ps, did I mention we’re awesome? pps., we’re kicking that Xero’s butt”
(actually that last PPS was mine… just kidding!).
The question then is, of course, should I buy shares? They’re predicting breakeven or profit in the next financial year, and revenues exceeding $20million, which would be an excellent result.
If thats true, Ecoya is a good speculative bet. See what I did there? I said “good”, which means “good”. And then “speculative” which means “good chance of losing all your money”. So Ecoya is a “good” “good chance of losing all your money”!
Hahahaha. Hilarious. I love this stock trading speak!
But the main thing is, Ecoya is a marketing company. They’re making SOS (same ol’ $#!t), but they seem to be marketing really well. And if you can market Vodka like the 42 below guys (which is essentially a pretty boring tasteless form of alcohol), they’re going to be like pigs in … er.. gooey smelly stuff marketing gooey smelly stuff.
So since I’m not a stock advisor, I have to make a call. And my call is, I think Ecoya will do well, assuming they still have facility to cover their expenses. They’re not super-expensive right now, you could buy the whole company for 30-40million.
But remember, you have a reasonable chance of losing the investment. Or doubling/tripling the investment. How much do you believe in their ability to market crap that everyone else is already making?
ecoyas bank looking pretty bare…?
According to my guesstimates, Ecoya, our beloved smelly marketing company should be running very quickly out of money, with the cupboard looking pretty bare around about now-ish…
Nothing specific, I’m just musing out loud…
Xero versus Ecoya – round 1!
Happy new year everyone!
To kick off the new year, I thought I would look at the 2 ‘glamour startup’ companies in the NZX, Ecoya and Xero. Xero as we know are a online financial software provider, while Ecoya sell ‘eco’ candles, body type stuff (obviously I’m a guy, but think smelly stuff for house).
Both companies are relatively new, with Xero (~2006) having a few years on its younger brother (2008). Ecoya obviously target a mass-consumer market (mainly cosmopolitan reading girls and the guys wanting to impress them), while Xero targets small/medium business (and accountants wanting to impress them!)
Neither has made any profit, with the March 2010 Annual reports showing revenue of 3.4 million for Xero, and 3.9 million for Ecoya. The Xero net loss for that period was $8.45 million, and Ecoyas was $2.35 million. So both companies are currently burning investors cash like a new years bonfire. In their latest (30 Sept ’10) interim reports, both indicate accelerating revenues (3.8million for Xero, 4.4million for Ecoya – note this is in 6 months), and increasing losses as expenses also ramp up, in Ecoyas case increased sales and marketing (no surprise) and admin (not sure why?) expenses. Xero are a bit less informative in their interim reports (which is funny for a financial software company! I find it funny. But my sense of humour is too ‘advanced’ for a lot of people).
So all up, both are looking… fairly startup-ish. Increasing revenues, increasing expenses etc.
Xero has dug a deeper hole in terms of current losses, but has a well-capitalised balance sheet. Ecoya has a bigger market (girls, and guys wanting to impress them!) but only 1.3million cash in the bank. Ecoya will definitely need some cash in the future, whereas Xero has enough to survive to their theoretical breakeven in 2011.
So thats the comparison in a nutshell. Xero, lots of cash on hand, high development expenses. Ecoya, pure consumer/brand play, huge market, not much cash.
On the face of it, the companies are pretty even. Xero is the more ‘glamourous’ stock at the moment, whereas Ecoya is flying very quiet. So its cash and celebrity that is the big difference between the companies.
So how much is Xero’s cash and celebrity valued at? In a startup, cash is worth much more than the face value. Cash in startup land = ability to survive another few months = not having to go back to market or raise debt = much less risk. If we do a quick market cap comparison, Xeros cash and celebrity are valued at approximately… $235 million! (thats the difference in market caps between Xero (270million) and Ecoya (33million).
Which… is quite a lot. Justified? Hmm. Ecoya will have to raise debt or go back to the market for more cash (unless Trilogy is an undisclosed cash machine). So there is a lot more ‘current’ risk associated with Ecoya. However, I would suggest that their model is easier, in that the high-end consumer products market is well proven, and the Ecoya board have a lot of experience (via 42below and the other board members) getting into that market.
So, although a much riskier current play, it looks like on pure revenue and model terms, Ecoya might be a reasonable bet. Oh yeah, if they can survive another year. Xero? At 10x Ecoyas valuation, the market sure does love Xero.
I love Xero too, but not so much at this valuation. I will be keeping a close eye on Ecoya, particularly with regards to cash flow over the next 6 months.
2011 is going to be an exciting/interesting year for both companies!
Xero – a great business?
The Xero share price has been rocketing up recently, making people a fair whack of paper money. Which is great, and why we invest in stocks right?
Right?
Well. Actually, not really. I know, the end goal is to make money. But I would submit that the “why” we invest is to actually own great companies at good valuations. Which end up making us lots of money, because they are great companies.
Why this definition? Well, many people in the stock market define winners as stocks where the price has gone up and up. As Xero has in recent months. Just like a rocketship after take off. So if you had bought at $0.75, and sold now at $2.68, you would have made a nice chunk of cash. But this is not how I invest (for better or worse!).
So Xero is a rocketship after take-off. My interest is whether Xero has enough gas to get out of orbit, and thats what is not clear to me now. I just can’t tell whether Xero is going to be a best-of-breed business, or a very successful company, or one of the also-rans in a highly competitive marketplace, or go bankrupt, or whether a big player will buy them out.
All of these scenarios are still on the table. My valuation of Xero portrays Xero as a ‘very successful’ company, with almost 2 million subscribers by 2018, and a ‘now’ shareprice around $3.75. Now, valuations can be wildly inaccurate, but they are a good ‘line-in-the-sand’ if you’re looking to work out whether a company will hit orbit. With the shareprice currently at $2.68… theres just not enough ‘up’ for me for all the risks still on the table.
So I’m watching Xero with interest. I suspect a buy-out might be the best outcome for Xero (and shareholders), but only time will tell.
Restaurant Brands, part 2…
Back to the beautiful world of deep fried chicken, with a serving of pizza, and a creamy coffee chocolate creme extravaganza!
So the first part of the story was just a simple look at how to identify a potentially undervalued company, in order to make yourself buckets of money which you can then use to buy buckets of deep fried chicken!
This second part goes more in-depth, and produces a snapshot image of the company, with a basic valuation. Heres the document, similar to the previous Michael Hill one, based on the Valueline reports produced by… well, Valueline, for US companies.
The big takeaways are that 1) the P/E is about ‘right’ for Restaurant Brands. 2) they have been increasing dividends fairly consistently after the Aussie Pizza Hut Debacle. and 3) margins are trending upwards, which is a sign that costs at Pizza Hut and Starbucks are under control.
An interesting aside is the treatment of leases. RBD obviously have some pretty big lease commitments, which are normally treated as an operating expense… But Damodaran argues that these should be treated as debt, because operating leases are much more like debt (in that if you don’t pay, really bad things happen to your company) than operating expenses. So I’ve broken these out and indicated that they are a form of debt.
So, my basic analysis indicates that Restaurant Brands is worth more. For people reasonably new to valuation, this is a pretty good example of a basic valuation. The “free cash flow” figure ($20,818,000) shows the money that the company gets every year. Assuming they keep making this forever, and pay off debt, how much is all those $20,000,000′s added up equal?
Obviously, a deep fried chicken coated in 11 different herbs and spices in the hand is worth 2 still clucking, so next years 20,000,000 is not worth as much as this years, and so on. The mechanics require a discount rate, which is makes next years (and the year after etc etc) 20,000,000 worth less. The discount rate chosen was 7.7% (PwC WACC), which includes 2% of growth (ie, rate of inflation, we assume that RBD can increase prices along with inflation). I suspect that the actual WACC should be a bit lower, which would increase the shareprice.
So finally, when all the mathmagic has been done, we get a share price of … $3.58! Current share price is $2.60, so RBD is sort of cheap according to me. The dividend is still around 4.8% which is pretty good for a stock with some potential upside. Rabobank are paying 5.3% for a 1yr term deposit, so at most you’re really risking 0.5%, and the KFC brand should see more boosting as the rest of the store upgrades start paying.
Let me know any comments, suggestions, corrections, blatant errors etc.
Disclosure: I sold out of RBD at $2.35, before I had done this valuation
xero half year earnings
Xero released half year earnings today, so I thought I should do an update. The numbers from the report:
| - Near tripling of half year operating revenues from $1.3m to $3.7m. |
| - Net loss of $4.7m – an increase of 24%, is expected to be the maximum |
| loss incurred as the company drives toward break-even. |
So that looks pretty good. It looks like they’re on track, although the increased loss, as expected, will make it interesting to hit breakeven, ie, EBIT = $0 by end of year 2011.
The previous model posted here looks good so far. The subscriber numbers are a bit lower than that forecast, but that suggests the revenue per subscriber is a bit below the $29 mark. Also, revenue numbers might be a little low, and expenses a little higher. But… not too bad for 6 months in the life of a rocketship!
Xero, spreading like a kiwifruit vine bacteria, taking over the world! (apologies to all kiwifruit farmers!). So… what to do? Does this change anything? For me, no. These results are good, but not spectacular, more or less what was expected/hoped. The Xero rocketship has cleared the launch-pad, hasn’t blown up spreading chunks across the landscape, and is pointing the right direction. These are all good things for a rocketship! There is a long way to go however to justify its current price (remember that Xero has made NO profit for owners, and has banked about $15 million in losses). Obviously the shares are up 5% in trading now, since the NZ market is pretty boring, and people need something to do.
PS. Don’t compare these results to last years results. Doing that for a startup is like comparing the altitude of a rocket before and after liftoff.
So, what to do? I would still suggest a part position, and waiting for the very big data points, namely annual results 2011, and annual results 2012. 2012 will be… huge.
Sure, it sounds like I’m being a wimp. And if Xero hits the afterburners, people who are in now will say “I knew it was going to work”, and “Greg, you’re a big, girly, wimpity-wuss”. But its my money, and I’m happy to miss out on the early upside and lock in (still significant) gains later in the piece when the clouds have cleared, and we know if Xero is going to the moon, or will be orbiting as a low flying satellite, posing a significant risk to adventurous birds.
how much is $25,000,000 worth?
Since no-one complained about me posting so much stock stuff, heres another! But first, a question:
How much would you pay for something that made you $25,000,000 each year?
Its not a trick question, but it is a pretty straightforward way of getting a quick feel for how much a company is worth (a trick I learned from Buffettology). The company in question here is… Restaurant Brands! Purveyors of fine dining experience, like KFC and Pizza Hut. And Starbucks for that frothed, ‘I can’t believe they call that coffee’ fizzy coffee flavoured beverages.
So Restaurant Brands are going through a super share-price ride at the moment. The best performing share on the NZ exchange. From about 60c in Feb 2009 to $2.85 today. Thats… well, thats a lot. If you bought $1000 worth of shares then, you would have approx $4500 now. Plus some pretty nice dividends on the way. A bank account paying 4% would have got you… a bit under $1070. Yay.
So, $2.85. Is that the top for Restaurant Brands?
Back to my original question: How much would you pay for $25,000,000?
RBD are expecting to make $25,000,000 in net profit. Assuming that you could put some money in the bank, and get $25,000,000 in interest, how much would you be prepared to put in?
Kiwibank just came out with this 5.00% sort of but not really on-call account. So 5% of whatever you put in is paid to you each year. To make $25,000,000 you would need to put in $500,000,000.
The point is: If you had the cash, and were happy with a 5% return, you would be prepared to buy RBD for $500 million… But right now, RBD can be bought, lock, chickens and deep-frying vat, for about $277 million. Which suggests that RBD is not as expensive as it might look at first glance.
Obviously this is a major simplification, with lots of assumptions. But all I’m saying, is… maybe theres a few more chickens to be hatched (and then killed, plucked, chopped-up, seasoned and deep fried) in the ol’ Colonels pantry yet.
Disclaimer: I do have some RBD stock in the portfolio. Yay fried chicken!
Michael Hill. Jeweller.
Greg Day. Part-time stock analyst.
Hmm, doesn’t really work. No panache. I don’t even really know what panache is, but I’m pretty sure my supply is low. Disclaimer up front, I own some Michael Hill shares, which I bought because they had been hammered during the financial crisis, so looked pretty cheap. And I liked what I read in Michael Hills book, Toughen Up. And the Michael Hill financial reports are amongst the best I’ve seen, very focussed on shareholders.
So, heres the analysis I have just done. Its pretty basic, summarises everything (based on what you get from ValueLine.com), and performs a simple (so simple I probably got it all wrong) discounted cash flow valuation.
Summary, Michael Hill is pretty cheap right now. According to me.
Let me know what you think, or if you’re sick of reading about stocks!
who wants to be an entrepreneur?
Being an entrepreneur is about accepting risk. Risk to succeed or fail, risk to make or lose money. That sort of thing. Its part of the territory. But theres other risks, that arent so obvious. Like risks to your sanity. My ongoing entrepreneurial activities regularly take me from quite high ‘highs’ to the opposite in a matter of minutes.
Like last week, had a good week visiting people and talking about Pronto, one of our new TXT messaging ventures. Really good response (its super cool), so was feeling pretty happy. A good couple of days, since enthusiasm begets enthusiasm!
And then, a brief interlude with our SMS gateway partner (they’re the people who give us access to the SMS txt network), where they basically told me that several intermittent problems were all because of my code. A few days later, they sort of admitted that their code is a bit dodgy. Does things like swallowing errors on a regular basis. And then they told me that in order to help me out, they were resetting a whole lot of previous read (and processed) TXT messages and marking them as ‘unread’, so the system could process them again.
WTF?!?!?!?! Feeling my heart drop to the floor and then bounce up through my throat was an interesting, if somewhat unpleasant, and not recommended, experience. That would mean that every client of Pronto would be spammed, and worse, all their clients would also be spammed. But they wouldn’t know it was spam, so they would reply, generating even more spam, and everyone would get all confuses, and then pissed. And then all the clients would have to apologise to all of their clients, and I would have to apologise to everyone. Thats a lot of apologising, and credibility falling like a rock with afterburners.
So from high to low, with not a lot of breathing time in between. When you’re doing your own thing in a business, often you’ll find theres a big fan, a big pile of shit and you, in that order. And sometimes the fan just turns on by itself.
Phew. Breath in, breath out. Relax. And don’t breath in when fan is on.
Xero, so… what?
I’ve had a few comments about my Xero valuation, a lot of which could be summed up by the words… “so what?”. In particular, people are asking if $3.55 means they should sell the family home, and load up on Xero stock (currently at $1.47). So understandably enough, theres a little bit of confusion around the value of Xero.
So what does $3.55 mean? It means that if everything I predicted comes to pass, then yes, you should load up on Xero. But hold on there Flash, you have to have some idea of the likelihood of predicting all that correctly. Which is 0%. Some bits are going to be wrong.
so we’re down to probabilities. Xero is worth ($3.55 x probability of sunny scenario + $X x prob of scenario X + $Y x prob of scenario Y + …) where all the probs sum to 1.
Lets look at a simple case, the sunny side versus the complete failure of the company.
($3.55 . 60% + $0.47 . 40% )
So, 60% chance of being valued at $3.55 versus a 40% chance of going broke, and selling assets at the net tangible asset value ($0.47).
equals…. $2.31!
Another scenario…
($3.55 * 33% + $1.77 * 33% + 0.47*33%)
33% chance of sunny side or a 33% chance of being worth half that (because of lower customers/revenue growth) or a 33% chance of going broke.
equals… $1.91.
In summary, depending on what you think the probabilities are will change your view of the current price. If you’re way bullish on Xero taking over the world, the current price is cheap. My take is that there is a lot of uncertainty around Xero, which will be reduced as each earnings release comes out. So for me, I would only have a small, speculative stake, waiting to add or reduce as those earnings releases come out.
Don’t sell your house in other words
Oops! Don’t do valuations with a cold…
Oops! A bucketful of apologies…
After getting over my cold, and having a break from all the numbers, I revisited the spreadsheet on Xero just to check it. Something didn’t add up. Once I looked, it was pretty easy to spot what I had messed up. The ol’ terminal value calculation, a beginners mistake. I blame the snot jamming up my keyboard.
The terminal value calculation basically adds the bulk of the value to the company, because it factors in all the cash flows after the company hits profitability. Its a big number, but I originally had it calculated as EBIT(1-t)(1-reinvestment)…
Doh! Which is actually just the free cash flow figure for the last year… oops. Sorry about that. Note to self: don’t do valuations with a cold.
So there were 2 steps missing. 1. Work out the terminal value from that cash flow figure, and 2. Discount that terminal value back to present value, and add it into the cash flows to get the firm value.
Which means, long story short, that there is a big number missing from the valuation.
Since I’m in revision mode, lets ‘improve’ some of the other figures. Firstly, lets cut down the Operating Margin to more realistic 15%, putting it in line with the best of the current SaaS firms. And lets boost the Sales/Capital ratio, maxing it out to around 4, hopefully reflecting that SaaS firms have lower capital requirements.
The end result of these changes is an addition of another $200,000,000 to the value of the firm, which gives a per-share value of $3.55. Sorry!
This is a very sunny-side valuation,so everything going pretty much perfectly for Xero. But whats in a couple of hundred million? The things to really focus on with Xero are: Growth rate in revenues (ie, customers and revenue-per-customer) and operating margins. If customer numbers don’t grow as predicted, for example if customers are only half of predicted, then the today stock price comes down to the $1.20 level. If operating margins drop (ie, expenses involved in moving to new markets are higher than estimated), value similarly drops accordingly. And alternately, if they go up, the stock price should increase. Roll on next earnings report!
In summary, note to self: be careful when doing these things! This is my first public valuation, so it was bound to go wrong. Learning from mistakes is always a plan… Apologies again! I will be tracking Xero on my spreadsheet as new news comes out, which I’m pretty excited about! heres the link to the spreadsheet.
Xero valuation – the final(ish) chapter
Lets just recap where we’re at. We’ve got a spreadsheet (see the last blog post) which projects revenue, customer numbers and EBIT. Sweet. So what more is there?
Well, the point of these posts is to do a discounted cash flow(DCF) valuation on Xero. And a DCF valuation needs cash flows, and EBIT is not cash flows. Net profit isn’t cash flow either, so theres a bit more digging to be done.
So what is cash flow? And why is it different to net profit? And who really cares, just tell me what I should pay for a Xero share!
Net profit is revenue – expenses – tax – depn – interest. So that all makes sense right? Money coming in, costs of doing business (including depreciation) and interest on any loans. And of course, the inevitable tax consequences.
Its an interesting number. Kind of. In a “mm, thats very interesting, whats on TV?” kind of way.
But as owners of a company, we’re much more interested in cash. Cold, hard, cash. Or, not cold, flappy paper cash. Any kind of cash. More = better. This cash is what we get in the bank at the end of the year, which lets us buy cool stuff. Like iPads. And food. Net profit is a more… airy definition, and you definitely can’t eat it.
So we turn to Cash Flow. Cash flow is intended to take the net profit, and work out how many iPads you can actually buy at the end of the year. The most interesting cash flow number is free-cash-flow-to-the-firm (FCFF). What this says is, sure, you’ve got some operating cash flows, but I want to know how many damn iPads I can actually buy at the end of the year! Dammit! FCFF in particular deals with capital expenditures.
And Xero has nearly 2 million per year of capital expenditure, mainly capitalised development costs. So it is pretty significant to them.
The idea with capital expenditure is it is what you are reinvesting in the firm in order to grow it in the future. So next years revenues depend on previous years capital expenditure. So how much will Xero have to reinvest in order to grow like the previous posts predictions?
Actually, thats a big question, so should be in bold: how much will Xero have to reinvest in order to grow like the previous posts predictions? its big, because it is hard to tell. Theres not much data, so its very unclear.
So, another guess, the sales to capital ratio. How much do sales improve by reinvesting a dollar in capital expenditure? My guess looks like:
| Xero | Terminal year (2018) | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
| Revenue from operations | $684,768 | $570,640 | $475,533 | $317,022 | $158,511 | $66,046 | $25,402 | $8,467 | $2,851 | $959 | $134 |
| EBIT | $171,191.92 | $142,659.93 | $118,883.28 | $57,063.97 | $23,776.66 | $7,925.55 | $1,016.10 | $0 | -8450 | -6751 | -4310 |
| Change in revenue | $95,107 | $158,511 | $158,511 | $92,465 | $40,644 | $16,935 | $5,616 | $1,892 | $825 | ||
| sales to capital ratio | 1.60 | 1.80 | 2.00 | 2.50 | 2.00 | 1.75 | 1.50 | 1.08 | 0.59 | ||
| Reinvestment (capitalised development costs) | $59,442 | $88,062 | $79,256 | $36,986 | $20,322 | $9,677 | $3,744 | $1,749 | $1,397 | ||
| Reinvestment (as percentage of revenue – interest only) | 10.42% | 18.52% | 25.00% | 23.33% | 30.77% | 38.10% | 44.22% | 61.35% | 145.67% |
The important line is the Sales To Capital Ratio line. This reflects my thoughts that SaaS systems take a chunk of capital expenditure, particularly when moving into new markets (eg: US), and that this will continue for the next 8 years. Putting these values up, ie, for every dollar of capital reinvestment, you get X dollars back in revenue in the next year, will obviously make Xeros valuation higher.
I’ve also estimated a stable reinvestment rate as a percentage of revenue of 10%, which is more or less in line with other internet companies. If anything, I think this number will be higher.
Theres a couple of other numbers that are needed before the final valuation. Beta, or the measure of the firms risk. I have started at 2.5 to reflect the significant risk with Xero initially, and decreased to 1.4 in 2017. It sounds about right. Risk free rate of 5.5% and a equity risk premium of 5%. Sounds pretty reasonable to me, but more guesses!
Ok. Phew. Damn this is a lot of work. Cutting a long story short, finally, how much is a Xero share worth, right now?!?
$1.12
And, according to me, thats a reasonably sunny outlook. Not blow you away stunning, but reasonably optimistic. I’ll put the spreadsheet up on google apps now, so you can have a play.
Xero 2-2: Guesstimates
So now we get to it, the guestimation. I’ve put in some educated *cough* numbers. You can tell these figures are 100% bang on the money because they have 2 decimal places attached. Sure fire way to ensure accuracy!
The actual live spreadsheet is up on google docs, so feel free to have a play (only change the numbers in blue). If you think I’ve made mistakes (which I probably have, this is hard and I have a cold), let me know in comments, and I’ll sort it out. Also, if you want me to change any of the numbers, tell me why and we’ll let everyone fight it out.
So some comments on what I tried to do:
- Note that the 2014 revenue and customer numbers are about the high-end of Xeros ‘potential customers’ from Rod Drurys AGM presentation
- The breakeven point is placed at second half 2011 (more or less – the march 2011 EBIT figure is close) so assumes Xero hits their predictions exactly
- [1] Intuit have yearly revenue of around $500millionUSD from QuickBooks. Note:Intuit is not SaaS but this seems a nice figure in 7 years
- [2] The operating margin for these kinds of companies seems to end around 25% so am letting Xero max out reasonably early
| Xero | 3/31/2017 | 3/31/2016 | 3/31/2015 | 3/31/2014 | 3/31/2013 | 3/31/2012 | 3/31/2011 | 3/31/2010 | 3/31/2009 | 3/31/2008 |
| Revenue from operations [1] | $526,022 | $438,352 | $292,234 | $146,117 | $66,417 | $25,545 | $9,123 | $2,851 | $959 | $134 |
| Guesstimate – Operating revenue growth rate | 20.00% | 50.00% | 100.00% | 120.00% | 160.00% | 180.00% | 220.00% | 197.29% | 615.67% | |
| Average customers @$29 – this is just an interest number | 1,511,557 | 1,259,631 | 839,754 | 419,877 | 190,853 | 73,405 | 26,216 | 8,193 | 2,756 | 385 |
| Average customers @$40 | 1,095,879 | 913,232 | 608,822 | 304,411 | 138,369 | 53,219 | 19,007 | 5,940 | 1,998 | 279 |
| Guesstimate – operating margin [2] | 25.00% | 25.00% | 18.00% | 15.00% | 12.00% | 4.00% | -20.00% | -296.39% | -703.96% | -3,216.42% |
| EBIT | $131,505.45 | $109,587.88 | $52,602.18 | $21,917.58 | $7,970.03 | $1,021.80 | -$1,825 | -8450 | -6751 | -4310 |
| Net operating loss at beginning of year | $0.00 | $0.00 | $0.00 | -$12,343.81 | -$20,313.84 | -$21,335.64 | -$19,511.00 | -$11,061.00 | -$4,310.00 | |
| Taxable income after tax write-off | $131,505.45 | $109,587.88 | $52,602.18 | $9,573.76 | 0% | 0% | 0% | 0% | 0% | 0% |
| Tax paid | $39,452 | $32,876 | $15,781 | $2,872 | $0 | $0 | $0 | $0 | $0 | $0 |
| Effective tax rate | 30.00% | 30.00% | 30.00% | 13.10% | ||||||
| Company tax rate | 30% |
So there it is, the first table of guesses for Xero, the 500million company! Let me know what you think.
Xero valuation part 2-1: Revenue
In part 1, we looked at a sanity check type valuation for Xero, the most exciting company on the NZ sharemarket. Xero does SaaS accounting, and their software rocks. And, world domination is the goal. I like that.
But whats a share worth?
In this part of the valuation, we need to start looking at projections. In particular, revenue projections. What is Xero going to earn in the future? Who the hell knows? Well, no-one really knows, but we will try and do a best guess exercise to find out.
The first step, particularly with fast-growing companies is: get the most recent data you can. The latest annual report came out in June 2010, and covers the period up to March 31, 2010. Which is cool. Or would be if it wasn’t bloody July! But at this point, its the best we can do. I firmly believe the next 6 month report, due I think in December, will be a crucial data-point in Xeros history, so we will revisit this valuation again then.
Revenue
One of the keys for valuing startups is… pretty obviously, working out how much revenue they are going to get in. This is hard. But there are some pretty key things to keep in mind:
- What do past growth rates look like?
- Size and growth rate in target market?
- Competitive advantages
Past growth rates. The tendency is, as startup companies gobble up all the low-hanging fruit (which is probably NZ for Xero), revenue growth rates begin to tail off. And we have seen some evidence of this at Xero, where revenue from ops looks like:
| 2010 | 2009 | 2008 | |
| Revenue from ops | 2851 | 959 | 134 |
| Growth rate | 197% | 615% |
so… hmm. Ok, theres only a couple of data points, but the trend line looks unhealthy. Mark as a fail. But thats why I think the next 6 month report will be fascinating. But anyway, 200% is still nothing to sneeze at, because as revenues increase, the compounding effect of those multipliers gets big. So its not just the growth rate thats interesting, but how long Xero will be able to maintain those rates. The key for Xero is, how long before it runs out of cash?
Size and growth in target market
This one is difficult to estimate. The size of the market is enormous, since every SME needs to do its books somehow. Growth in the market? This is probably best estimated by viewing growth in Xeros competitors. MYOB is the main one that springs to mind, but unfortunately has been delisted, so details are scarce. So lets look at Intuit in the US for some growth figures. Unfortunately, Intuit is a bit of a different beast than Xero, in that it gets revenue from several different sources, including payroll and payments applications, tax, and a few other things I don’t really get. But a reasonable chunk just comes from QuickBooks, which is basically playing in the same sand pit as Xero, so I’m going with that.
| Q1 ’09 | Q2 ’09 | Q3 ’09 | Q4 ’09 | Full Year 09 | Q1 ’10 | Q2 ’10 | Q3 ’10 | Q4 ’10 | Full year ’10 |
| % change YOY | 7% | (1%) | (9%) | (5%) | (2%) | (7%) | (3%) | 16% | 2% |
Hmm. So thats about as clear as mud. No idea what happened in Q4 ’10, but I think the story here is that there is not a huge amount of growth happening in the market as a whole, at least from the Quickbooks example. Maybe there are other players growing fast, but… mark that a fail.
Competitive advantage
Theres not too much doubt that Xero is the coolest piece of accounting software around, and it would be (and is) difficult for competitors to move into this space. People think that you just need to chuck up a few servers and a web-page, and its all done, but the high-volume SaaS space does not work that way. The difference between a crap piece of software and a user-friendly loved product can be very subtle. And I think Xero have done an excellent job.
So there is some competitive advantage there. But that assumes that you are in the market to ‘buy’ accounting software. Everyone who currently needs one has some form of solution to this problem, so there is a built in anti-competitive advantage for Xero, namely resistance to change. So each sale has to be earned.
Summary
So what have we learned? Well, we’ve learned that the market for accounting software is probably not booming, Xeros revenue growth is trending down with no big markets coming on board in the near future, and that, while some competitive advantage exists simply because Xero is excellent, making new sales is probably pretty hard.
Its not a great story so far for Xero. In the next section, I’ll stuff some arbitrary revenue numbers into a completely falsified spreadsheet, add a couple of decimal places to everything, and pretend the revenue projections obtained are as factual as a Oprah show. And probably start to look at operating margin. Which, while not the mostest fun you’ll ever have, is at least better than a root canal.
Xero valuation – part 1
So went off to the Xero AGM the other day. For those who don’t know, Xero is a online accounting system, SaaS stuff, and generally most excellent. Its basically the most interesting company on the NZ stockmarket, given that it is operating in a global market, and with massive potential for growth.
Its an awesome example of … dreaming big from NZ. This is the kind of thinking that NZ needs. So I have super-high expectations for Xero.
But… what is Xero worth? Someone asked me whether Xero was a good buy and I went… hmm. I love the story, but do I love it at this price?
So I thought I would do an investigation and attempt a valuation on Xero, to answer this question and to practice. This is part 1, which is a super simple look at the business of Xero, and perform a basic sanity check valuation.
Summary of Xero: SaaS accounting business, revenue from user subscriptions per month.
Assumed numbers:
- 20,000 -number of current subscribers. The annual report says 17,000 but I vaguely remember the 20,000 figure from the AGM.
- $40 – average revenue per month per user (ARPU). Probably pretty generous, since I imagine a lot of users are on the lowest price point ($29/month).
- $1.59 - current share price
- 83,455,000 – Weighted average shares
- $130,000,000 -current market capitalisation, probably a little on the low side
So thats pretty basic. 20,000 subscribers, each paying $40 per month, so $800,000 per month revenue. This value is forward looking so, if we stop customer growth from now on, this is how much revenue would be received. So what does that mean?
To work this out, remember that $40 today is worth more than $40 in a month, because of inflation and opportunity cost. So to work out the present value of the monthly income from subscribers, we need a discount rate. This number is a bit arbitrary, and can be calculated a lot of different ways, but its meant to reflect the risk free rate, ie, if you stuck the money in the bank (and the bank didnt go bust!), plus a bit because stocks and companies are risky. So, I’m going for a risk free rate of 5.5% and a extra risk bit of 4.5%. Which all is obviously a complicated way of saying 10%!
I’m going to look at a subscriber staying with Xero for 5 years. Why five? Simply because 5 years is quite a long time in internet world. I might look at a 10 year period too, just to see. So, lets work out how much those future cashflows are worth to us now:
Present value of 1 person paying us $40/month for 5 years: $1,898.30
which is obviously less than $40*12*5 ($2400) which reflects the discount rate.
So each current subscriber, assuming they stay with Xero for 5 years, is worth $1900 to Xero. Now, if we look at Xeros market capitalisation, $130 million, and divide that by the number of subscribers (20,000) we get a market cap per subscriber of : $6500
Therefore, if you bought the whole company now, you’d be paying $6500 in order to get $1900 back over 5 years.
Which is completely whacked out, padded-cell, rubber spoon, straight-jacketed, 2 eggs short of a dozen nuts. So, whats wrong here? Why is Xero priced so much higher? Answer: growth and estimated market, and… risk.
But this is a warning sign. When the current valuation per subscriber is so much off the revenue that subscriber will generate… theres potentially an issue here. Bear in mind valuing early stage companies is … hard.
Let me know if I got anything wrong, which is highly likely, and any questions/thoughts. In part 2 (and maybe 3-10!) I’ll go through a more detailed evaluation of Xero.
Appendix:
Present value calculation is : =PV(0.83% (ie, 10%/12),60 months,$40/mth, beginning)
vibram five fingers review…
I received a pair of vibram five fingers (VFF) KSOs for my birthday. Although my birthday is not technically for another little bit, I received them early, which I guess makes them not a birthday present but more of a “hey you’re great” present, which I should probably received almost every day. Almost. I have my not-quite-great-but-still-pretty-awesome days.
So, what are they? And how well do they work?
VFFs are gloves for your feet. The marketing spiel says theyre intended to get you “back to nature”, and be close to “barefoot running” etc etc puke. They’re basically thin rubber soles with a fabric upper, and space for each toe, just like a glove. They’re very minimalist, and, like a bikini or lingerie, you definitely don’t get a discount because theres less stuff in them.
Putting them on
Putting them on is a little tricky the first time. But my technique is, put your foot in, aim to get your big toe in the big toe space, and then scrunch up until all your toes are in place. I know! Scrunch is not a real verb, but it basically means flexing your toes and moving them further into the shoe. Scrunch!
Using
The trick with these shoes is covered in ChiRunning: A Revolutionary Approach to Effortless, Injury-Free Running
and in two seconds its landing on the ball of your foot, not your heel. This is weird to start with, and will give you immensely sore calves for a few weeks. “Pain is weakness leaving your body”. Unless your hand is inside a blender and its on.
So it takes a bit of getting used to. But persevere, because it is worth it!
So you’re running on the ball of your foot, and you’ve got your VFFs, and … it pretty much feels like you’re running barefoot. More or less. Its a bit warmer, and you’ve got a bit of protection, but it really is pretty good. You can feel everything you run over, and your lower legs do much more work balancing and adjusting, particularly when you land on sharp stuff. Its really quite different, and really fun.
Landing on sharp stuff
Since most of the time I run in the hills, theres always sharp stuff like rocks and roots and bear traps (actually no bear traps) to land on. In most cases, you instantly adjust your weight so these painful encounters don’t worry you too much. In some cases however, you definitely feel the minimalist side of the VFFs, which is one of the two downsides of these shoes. Most of the time, its not a problem, and certainly not enough to not recommend them. But sometimes, it does bloody hurt.
Less traction
The other ‘downside’ is only a downside if you mind skidding/sliding down slippery banks in the mud. I don’t, its great fun, so not much of a downside for me! But traction is much less for the VFFs (I like saying VFFs!) than for a normal off-road running shoe like the Asics Trabuco or similar. In some cases, its a bit of a 2 steps forward, 1 back, but its been raining and the ground here is soft, slippery (fun!) clay.
Summary
They’re really cool, and I will probably not buy another pair of running shoes. They look kinda funky, so might not be for the image conscious, unless you’re so cool, the image-conscious want to be like you. Or you’re so uncool, you’ve gone full circle and are actually really cool.
But it is really fun to run in these things, once you’ve got through the obligatory few weeks of calf pain while you harden the hell up. You run around jumping on narrow things and can actually balance because you feel exactly where you land, they’re light as hell so it feels like you can run faster, and generally they’re a good thing. Anecdotally, I haven’t had knee pain since wearing them, which I usually got a bit of when running. Im not saying these things are responsible, but… just saying right?
Summary of the summary
5 stars. Out of 5. Minus a little for me landing on a damn sharp root. Which hurt. But it still rounds up to 5.
