The Koz (Business Coach)

Facebook: Our First Trillion Dollar Company?

2012-04-11T13:31:00.003-07:00

Facebook our first Trillion Dollar Company?

So I was looking at the estimated market capitalization for “The” Facebook and all indications are that it will open close to $100 Billion. The Facebook stock is trading on private markets at $40 per share also giving it the estimated market capitalization of $93 Billion. This may be the open price but from what I have seen, nobody seems to get the IPO price except the underwriters, this holds true even if you queue your buy to hit the second the markets open. This brings me to the question of “How high could The Facebook stock go?” I think we all believe that as soon as it opens the price is going to jump.

Stock price has many variables but what I am interested in is that The Facebook has $1 Billion in EBITDA (in layman’s terms: profit). So the price is 100 times earnings right out of the gate. Early buyers expect to get multiples of their money. It is my understanding that this $1 Billion is twice the EDITDA of the previous year. So if The Facebook keeps doubling their EBITDA, will their stock price also double as well? If so, this would mean that if The Facebook doubled their EBITDA four times, the market cap would greatly exceed the Trillion dollar mark.

How could this be if companies like Apple and Exxon already greatly exceed this EBITDA level and do not have a market capitalization anywhere near a Trillion? Exxon makes much more profit than Apple and Apple has the larger market capitalization because it is a technology company and the business model is more leverageable than Exxon’s. The Facebook business model is more leverageable than Apple’s, no physical products to manufacture or distribute. There is a long list of internet based companies that have had their stock price rise by 10, 20 and more than 100 times what they were first offered at. I personally think greed by the underwriting consortium has damaged the value proposition for purchasing The Facebook stock.

But people want to believe, and buy into the hype like: “The biggest IPO ever!” and “The hottest IPO”; small time investors don’t want to be left out. The “buzz”, marketing machine helps the underwriting consortium get their money out immediately, there is great risk to investors that stay in. I recently went through a list of 25 “Hot” IPOs and of those 20 faltered and only one is trading above the Pop (initial offering spurt) price.

The Facebook does have some advantages over companies like Google. For example, the data that The Facebook has is more valuable than Google’s, “How so?” you might ask, Google can see what you are searching for and present adds based on that search at that point in time, The Facebook can see what you like through groups, associations, comments, clever apps that provide them with family member lists, best friends… not only does this info detail a profile of you that gets more comprehensive every time you sign on to The Facebook, but it is stored forever not just during a search. Data mining potential goes through the roof. I doubt the average person/investor has seen the value in this but rest assured that The Facebook will monetize it sooner or later.

I believe The Facebook will grow its revenue quickly. And if The Facebook launches at $42 with an EDITDA of $1 Billion and quickly goes to $10 Billion… Will investors reward it with a Trillion dollar market capitalization? I hope not. It will just pump up the market unnecessarily and when it falls it will bring the entire market down.

But then again I thought Google was overpriced when it went public. Maybe we will see Trillion dollar companies in the not too distant future!

The Koz

www.SmallbizMaster.com

2012-02-03T12:16:00.001-08:00

Just wrote up an analysis of RIM stock, with a few lessons to be learned for small business.
http://ping.fm/A9jCB anyfeedback would be appreciated.
The Koz
www.SmallBizMaster.com

RIM Stock Analysis: Lessons for Small Business

2012-02-03T11:42:00.001-08:00

Most people do not believe that they have the skills to evaluate stocks in the open market. For the most part this is true, but with a little guidance, I will show you here that the basics are relatively easy. These same skills can be used to evaluate your own business and get you closer to financial success. For this purpose I have decided to use the stock of Research In Motion (TSX Symbol: RIM) as the basis for this case study since it is in the news with ample controversy and actively traded. By going through this process you can see things that may not be obvious to you, as you are probably too busy to see the cracks. The first step we will take is to look at the financials of the company and the fundamentals within. I’ll try to stay away from technical jargon as much as possible. A good chunk of stock information can be garnered from online financial sites like StockCharts, Yahoo Finance, Google Finance or a myriad of others or the stock exchanges themselves.

1. Financials:

Income Statement: Most recently I read an article by a business journalist stating that Research In Motion (RIM) was fine and that the net profit was 17.13% and they went further to say it was well above technology companies like HP. Although this was technically true, after my own review it was apparent that they were using the latest annual financials supplied by RIM. Public companies are required to file quarterly statements and if the journalist took the time and did the homework, they would use the lastest filing to confirm this statement, which it does not. In the last quarter filed by RIM, net profit had sunk to 5.13 %, quite the distance from 17.13 % and nothing to brag about in the technology world. Income from RIM looks like they have about $20B in revenue coming in when the last 4 quarters are added up. This is consistent with the latest annual financials that RIM submitted for 2011 (Ending Feb, 26 2011), old but most current. This indicates that despite the negative publicity and competition concerns, revenue has not dropped off the map by any means; this however does not cover a lost opportunity in a growing market. So while RIM is not selling that many phones compared to the newer phones in the market, how do they maintain a consistent revenue stream? This is due to their business and revenue models; they make lots of money in other areas (more on this later).

When looking at a company and how much income they generate, it is more important to look for trends in the revenue they make, i.e. comparing quarter to quarter or in the case of small business month to month. When we look at RIM’s last 4 quarters we see that the revenue has been stable but at the same time profit margins are sinking to less than half of what they were 12 months earlier. This could be a sign of selling their products on price and not product value (bad marketing) or could be that operational costs have gone up, let’s take a look at this. Cost of goods, microchips, screens and assembly have gone up, but nowhere near the 12% delta from 12 months earlier (17%). We know that technology employees are expensive and usually have significant raises and bonuses, its part of the tech industry but in the case of RIM, accounts for a small amount. In review of press coverage during the slide in net profit in the last two quarters, RIM did not have any significant new products for the holiday season and wrote down $484M for inventory of its poorly selling playbook (compared to other tablets) and discounted these playbooks by approx. 50% (selling on price). These last 2 profit eaters appear to be temporary.

For investors, a typical ratio that is looked at is P/E (Price to Earnings ratio) price of the stock compared to how much money the company made per share (profit/outstanding shares) and is expressed in multiples. The current P/E for RIM is 3.92 or a multiple of 4 compared to Apple 13, Google 19.5 or HP 8.5. Is RIM stock underpriced? We need to keep looking for other indicators.

Lesson: So how does this benefit the small and medium sized business? Trends; look for trends in your financials. Most small businesses use software like QuickBooks or Simply Accounting, these packages aside from being a bargain have the ability to graph or to export to Excel to graph out profit trends, revenue trends, cost trends, cycles in your business (high times and low times and how much in each direction). There may be software plugins for your accounting software to analyze your financials to show you things one might not normally catch. Outside from the obvious revenue trends, profit trends could spell out when you need to make a change to your suppliers or to pricing policy while you still have time to plan for them, with minimal impact on your customer base. Identifying cycles in your business could dictate when to crank up or plan your advertising/marketing campaigns to get the most out of your marketing dollars. Consider this homework.

Balance Sheet: One thing to note about Research In Motion at this current state is that it is trading below book value. What does this mean? It means that the market cap (the stock market value of the company, outstanding shares * stock price) is lower than the net asset value of the company. To further clarify, the market cap of RIM is $8.75B but asset value of the company after liabilities are subtracted is $10.2 Billion. The company is worth more if it stopped operations today and sold off the assets, as opposed to the value that the stock market is giving RIM (undervalued by definition).

The balance sheet is a snapshot of what the company owes and owns at any point in time, so the difference must be the value, right? Wrong, it is only a starting point despite what your accountant might tell you. The value of the company is what someone is willing to pay for it in an open market. But wait, there’s more; trends again, in RIMs case one good trend to look at is total equity in the company. The balance sheet filed by RIM for the last four quarters, show us that the equity in the company is going up by hundreds of millions of dollars, every quarter. So how is it possible that the stock has been falling at the same time (which it has) you may ask? Perception, more on this later. Also during this time of increased equity, RIM took a write-down for the playbook inventory of almost half of billion dollars. So what is the company worth since we have the balance sheet? It depends on who you ask, the market, an accounting firm, a strategic investor or you, they will all have different numbers. The movement in these numbers has been the topic of debate for a long time but that could fill a few books so we will stay away from that. Reasoning found in the lesson.

Another fundamental basic in RIMs case is that they have $1.1B in the bank and another billion in long term assets and… No Debt. How many companies can say they do not have any debt? Not many.

Lesson: When you look at your balance sheet it usually looks straight forward but if you print out monthly balance sheets for the last twelve months or display them on the screen in graph format a story begins to unfold like a book and you now have the ability to write the remainder of it knowing where you have been and where it is going. You can also write in a twist, “We need a new product line.” or “We need to get into a new market by this date or else.”. Most accountants might say that this type of information can be garnered from the combination of income statements and cash flow statements but most managers do not have this training. This way you can generate the information by yourself. To address the hole I left in the value question, a company that is building positive equity in the corporation is worth more than the snapshot (balance sheet) and vice versa, a negative equity build is worth less than the snapshot.

Cash Flow: This seems to be a mystery to most people but it shouldn’t be. By definition it is changes in financial position, but I will simplify it more, money in money out. In the case of RIM and looking at their annual financials more money has come into the company than went out, positive cash flow. But, I can here you saying it now, if you look at the last 3 available quarters it tells a different story. Of the three quarters, only one had positive cash flow. So in the last annual filing there was a $240M positive cash flow. The next quarter was $195M positive, next -$940M (negative), next -$668 (negative). How did the company start burning cash so suddenly? It didn’t, if we dig deeper we see that in the last annual filling there is an entry for “Financing Activities” of $2B. This two billion offset the burn rate so they didn’t cut into their reserves. It should be noted that RIM has another entry on their cash flow statement, “Investing Activities”, RIM has heavily invested in themselves in the last 3 quarters, 3 times as much ($5B) as the entire previous year ($1.7B). This makes up for more than the shortfall in cash flow. RIM has consciously invested in itself during some competitive times at the expense of having the cash flow statement look negative. Is this large reinvestment a onetime thing? Probably not too far off but one thing is sure, that RIM felt it had to reinvest which is a good thing.

Lesson: So what can be learned from this by the small company? Trends and forecasting, small amounts of negative cash flow usually go unnoticed. If you follow these trends, however small, sooner or later you will be bankrupt. A simple analysis of the trend will give you the information you need to properly forecast with the sales and marketing functions of the business. Knowing the needed absolute minimum performance levels of the team will possibly lead to some tough decisions.

2. Market Perception

We have all heard that old adage that perception is reality. This especially holds true in the stock market. Despite what the fundamentals are within RIM, if people hear that the company is floundering and they own stock in RIM, they might get nervous and sell. Many years ago before the average person was active in the stock market, the market was primarily made up of institutional investors that knew better than to sell a stock on a rumour. Massive downslides were few and usually warranted. Flash forward to today, millions of uneducated (well not stock market savvy) individuals are active in the stock market and even day trading. This changes the landscape, if this new investor class gets jittery when the stock falls a few percent, it could trigger a large sell by thousands of these speculators causing the stock to drop. In turn the selloff could spark even more selling and so on and so on, despite the fact that the company hasn’t changed. This logically brings us to the position of media coverage, not so much from a point of “What is RIM doing?” but rather “What are the people/new investors being told?” The later may be more important if the stock is widely held (less institutional investors) by many investors, as is RIM. Stated more succinctly the RIM stock price is more susceptible to media coverage, good, bad or erroneous.

Compounding the complexity with RIM is the generally accepted position that Research In Motion is a phone company. They are not, they are primarily a software company and that is where RIM makes most of their revenue and it is recurring revenue. Run the math, RIM has 75M Blackberry phones out there. If each one sold on average for $400 (actuality less) that would only be $30B over the Life of the company, but they are making $20B, year over year. Where is the additional revenue coming from? Software licensing.

RIM is now refining the product direction and reducing the number of new phones they will be offering. In 2012 they will have a “Superphone” but not 10 models of them. Does this sound like a familiar model, iPhone. The phone might come late to the game but if it is a great phone it will protect the recurring revenue base and more. RIM has traditionally been big with businesses because of their technology (to be discussed in the next section) and unique offerings (that they still have). It has only been in the last 5 years or so that RIM has been selling to the consumer market in a big way.

One problem that RIM has had for a long time is in the area of communication. Traditionally RIM has sold into corporate accounts with sales representatives and that worked fine and RIM built the company on that. The model was good and RIM got a lot of money from each account. This does not work at all in the consumer market. Not only can RIM not send out a sales rep to sell a phone to the average consumer, but if it did they would lose money on every phone sold. The more phones sold the bigger the loss. A new marketing strategy must be used on a one message to thousands (or more) of potential consumers. That message must be compelling and accurate because there will not be a sales representative beside the consumer to continue to sell if they don’t understand the value message. The average person cannot see a picture of a Blackberry or see the Blackberry name and understand the value to the point where they buy a Blackberry. One company that has communicated well is Apple, generating much anticipation and keeping the product under wraps until launch. RIM on the other hand has had so many leaks to the media that people aren’t listening. The new CEO has identified that they need to communicate better with their customers. What this means in practice is to be seen.

Lesson: The lesson to be learned here requires more homework. Take the time to understand your customer and where you play in the market. Control information the best you can, every government lives or dies by this. The markets are constantly changing, giving rise to new opportunities and customer demands. In the case of RIM, they tried to use parts of the sales and marketing model that worked for them in the corporate world and apply them to the new opportunities of the consumer market. It didn’t work. A small business must learn that the world around them is changing as well and you must change your marketing strategies with it. By all means, please communicate dynamically and communicate your story to the right people. The only thing worse than bad communication, is no communication.

3. Technology

As stated earlier Research In Motion offers more than just a phone. One product that RIM launched last year was the Blackberry Playbook. This device was the company’s first step into the tablet market. Initially the tablet was received with criticism, doesn’t have native email, smaller screen than the iPad, not many applications available. This was all true but it was by design and RIM did not communicate their intent well. The target is/was for the mobile market and preferably the business sector. If you have worked with an iPad for any time you know that it has a large screen but is a bit of a drag carrying it around based on size and weight. Blackberry has the strongest email platform bar none and consumers expected that functionality built in, even though competitors didn’t have this. RIM did build in functionality for a connection to a Blackberry via blue tooth which gives the user secure email, calendars, tasks, contacts and BBM, along with a few others. Applications were surely lacking and RIM has had a hard time getting developers to write applications for this platform since spending their time writing for a larger market (iPad/Android) is more profitable. Applications are important but most users use their tablets as a portable browser. The iPads browser has limited functionality and is closed (everything goes through Apple) for the most part. The iPad browser also does not support Flash (the animation component for most websites). This seriously impacts a user’s internet functionality since millions of sites use Flash. The playbook supports Flash. So is RIM going to address the other perceived short comings? Yes, come to the rescue OS2. On February 17 RIM will push out a new operating system that will address most of these concerns. It will have native email, more functionality and support for Android applications which means thousands and thousands of new applications for the platform. Another note worth mentioning is the Amazon Kindle eBook reader “Fire”; it is outselling iPads, is colour, has internet access, has the same size as the playbook and sells for $199. The playbook has recently been priced at the same level as the Kindle during promotions over the last several months, has loads more functionality including several eBook reading platforms, but has not been able to match the product volumes of the Kindle. A commercial comparing the two could do a lot for playbook sales. Clearly superior in all areas but no one knows that.

BES/BIS? Blackberry Enterprise Server and Blackberry Internet Server (respectively) are products that make RIM a lot of money and keep the cash flow going. These services for corporations and internet customers offer secure email, a service that RIM does better than anybody on the planet today. Their security seems so good that governments are concerned about letting the service function in their state because they can’t break the encryption. With some of the largest online email providers changing their privacy policies, and not in our favour, sooner or later even the average consumer is going to understand the value of secure email. It might seem like something out of a Hollywood movie but corporate spying exists in a big way and consumer spying and tracking is very profitable. The large email services are not secure and big brother is watching you, we just don’t know whose brother it is.

QNX is a recently acquired company of Research In Motion. This is an operating system that RIM will be using in their new phones and probably their tablets as well. QNX is lean, fast and solid. With the population using their phones as data communicators and as application platforms, more power and functionality will be needed (i.e. path of the PC, now as powerful as supercomputers of yesterday). With the demand for powerful applications being created by users, a faster phone will also become a demand. RIM is coupling QNX with the fastest chips available, in fact the chips are so cutting edge that they are not available until the summer and that is what’s holding up the Blackberry “Superphone” (code named London). Some technology rags suggest that RIM will be late to the market, but if they use the best operating system with the fastest hardware, RIM will in fact have the most advanced phone at that time. If applications get more advanced in the meantime, all the better as they will run better on the RIM platform. It appears that any QNX device will run the Android applications, phones and tablets. To further suggest a bright future for Blackberry devices, Samsung (leading seller of Android phones) has engaged with RIM to review possibilities of licensing QNX for their Android smartphones. This could be scoping out the future competition but in light of the licensing settlement with Microsoft which will cost Samsung $12 to $13 for each Android phone they sell, this might be a genuine alternative.

Lesson: Although RIM is a technology company and most small businesses are not, the message here is to distill the value in your product and leverage it in ways you have not thought of. Like RIM, explore the possibilities of marrying your product with other products to give your company something unique, a differentiator this could be your new value proposition. It doesn’t just apply to products; it could be services as well. Take the time to brainstorm matches for your company. Yes more homework.

4. Summary:

In the case of Research In Motion we can conclude that the underlying business model is very strong. The company is taking in $20B annually, one fifth of Apple’s revenue at approx. $100B. Apple’s market cap is $425B, RIM’s market cap is $8.5B, two- one hundredths of Apple’s cap. Quite disproportionate, but Apple has $30B in the bank (and more in long term investments), on the other hand you don’t pay out multiples on dormant cash. Yes, RIM is burning some money, but they chose to by way of internal investment. The product lineup seems strong, streamlined and strategic. Management has changed and new management seems to know that there are some marketing changes required. If you are wondering if I invested in RIM… The answer is that during my research (homework) for this article, I did. But the question should be: Would someone invest in you?

The Koz

www.SmallbizMaster.com

2012-01-26T13:27:00.001-08:00

Small Business Loans In Canada More Available Thx to BMO http://ping.fm/85ZwP
The Koz
www.smallbizmaster.com

SEO Doesn't Make You Money! Unless...

2012-01-12T09:12:00.000-08:00

That's right.

For years now many clients have told me that they were going to start doing SEO marketing and all their problems will be solved. Unfortunately this is rarely the case. Why? 5 Reasons:

1. Passion - In a nut shell getting your site to number 1 does not instill interest in your customers. SEO companies manipulate text without the understanding of the customer drive. SEO companies do not protect the passion of the message. This must come from the business leaders.

2. Analysis - Although you and the SEO company may choose words or groups of words that will be used to get to the top of the list for same, there is no direct link that this is what your customers are looking for. A business leader/analyst or consultant should be used for this. These people can research what customers are looking for specifically, trends and cross relations that potential customers use to find products and services. This type of work takes time and will never be factored into SEO prices, even if they knew how to do the work, (which I have yet to see).

3. Copy - This is what you say on the website. How you describe your wares is paramount to a sale. SEO companies cannot help you with this and further you must protect you message from SEO modifications so that the entire message is not watered down or broken. This is a time consuming process but will give the biggest payoff. Your business mind has to do this.

4. Flow - Choosing the text (copy) is one thing but there is an opportunity in when you present each idea to the reader. By choosing these in a strategic order you can guide the thinking of your customer. To do this you must put yourself in two minds at once, the buyers and the sellers and marry the two. Not a component of SEO.

5. Call to Action - Once you have successfully completed points 1 to 4 you must remember sales 101 at business school, Ask for their business! Get them to pick up the phone with an incentive or a buy with some limitation. You need to know when to do this. How you do it must take into consideration the type of buyer you have at your door.

Although SEO firms do not offer these services and the expense will almost certainly exceed the SEO work, the time and money you spend on this should be recovered in sales. If you're only planning on spending money on SEO, balance your budget with business knowledge.

The Koz
You can email me: robert@smallbizmaster.com
www.SmallBizMaster.com