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A New Home

November 8th, 2014 No comments

All my future posts and articles are now posted at The Firstadopter Column. Please check it out -> Link

Categories: Articles, News

Current Report Card on @firstadopter Top 10 Predictions for 2014

October 3rd, 2014 1 comment

At the beginning of each year I write a top 10 predictions post. Here’s a current report card on the 2014 post thus far:

1. T-Mobile will continue to take big market-share from Sprint, AT&T and Verizon Wireless as they simply have the best value proposition in the industry: good enough quality (far better than Sprint) at a lower price.

Looking good.

2. Microsoft will be forced to lower the price of the Xbox One console to compete with Sony PS4’s sales dominance.

Correct.

3. Apple will launch a larger screen-size iPhone, which will be a huge success leading to significant earnings acceleration.

Looking good.

4. The rise of little-to-no profit margin Chinese Android smart-phone companies like
Xiaomi will compress margins at Samsung Electronics.

Correct.

5. Amazon will launch a Kindle Fire phone with a free or low-cost data plan like FreedomPop. It will not get traction just like the Kindle Fire tablet. Amazon’s media sales growth rate will mysteriously tumble in early-to-mid 2014 due to comp-ing the 3P to 1P ebook accounting shift, which added billions of misleading revenues in 2013.

Wrong.

6. Electronic Arts and Activision will both disappoint the street as gamers revolt at the publishers’ deteriorating game quality.

We’ll see. Destiny was a critical disappointment and Battlefield Hardline got delayed.

7. Sears Holdings’ digital transformation strategy into e-commerce, digital marketing, and 3rd party marketplaces will fail miserably.

Correct.

8. The Zynga turnaround will fail leading to a large layoff.

Looking good.

9. Uber’s private valuation will sky higher as the startup has a killer profitable business model with a powerful viral network effect. The company will eventually establish a platform for other verticals outside of transportation.

Correct.

10. Twitch.TV and Oculus Rift virtual reality headset gaming startups will both become massive success stories.

Correct.

Categories: Articles

Don’t Forget the “Hedge” in Hedge-fund

September 16th, 2014 No comments

Recently a large pension fund decided to give up on investing in hedge-funds citing complexity, high fees, and lack of scale. This news sparked a slew of articles saying this was a watershed moment on how hedge-funds as an asset class underperform and weren’t worth their fees.

Yes the vast majority of hedge-fund managers do not perform well enough to justify their fee structure, similar to active fund managers. However I do think one must grade hedge-funds in a bit more nuanced fashion.

Hedge-funds are hedge-funds because they often “hedge” and have market net exposure lower than a 100% long portfolio. If a typical hedge-fund has net exposure of 50% vs. the market, it is bound to underperform the market during big up cycles, but if it can provide a net return above the net exposure it is worth the fees.

Any capital allocator can easily find cost-effective methods to get long exposure to the market through passive index or futures strategies. Finding true alpha generating investment managers is much more difficult.

Hedge-funds are attractive to their clients because they should provide uncorrelated returns, true “alpha” relative to their net exposure to the market, and strong returns through a full up/down market cycle. They should be graded on those measures.

Categories: Articles

Microsoft Xbox One Console Mark-downs

February 9th, 2014 1 comment

With all the channel checks showing a dramatic slow-down (Link) in next generation Xbox One hardware console sales in contrast to the Sony Playstation 4 sales staying relatively better, it is not surprising to see retailers marking down the Xbox One with promotions and bundles to get their inventory moving.

1) Frys selling for $20 off

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2) Newegg and another eBay seller selling for $20 off too on January 27th, 2014

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3) Newegg bundling a new Xbox One and EA’s Battlefield 4 game (worth $60) for the same price as an Xbox One

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4) Costco selling the Xbox One for $479.99. h/t @iansherr

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Categories: Articles

Best Buy’s Implosion was Predictable

January 16th, 2014 1 comment

Reading all these articles and sell-side notes today on how analysts and journalists were “stunned” and “shocked” at Best Buy’s holiday sales report leave me a bit perturbed.

Brian Sozzi, CEO and chief equities strategist for Belus Capital Advisors, said Best Buy’s results were "shocking." Source

There were at least a 1/2 dozen clear data-points in the past few weeks that pointed to the increasingly promotional environment and weak consumer electronics sales trends. It shouldn’t have been surprising at all. Obviously none of these so-called experts follow me on Twitter.

Read some of the data-point tweets below:















Categories: Articles

Next Generation Console Channel Checks

January 16th, 2014 No comments

1) Best Buy (posted 1/9/14) Link

2) Gamestop (posted 1/9/14) Link

3) Best Buy (posted 1/2/14) Link

4) Target (posted 1/1/14) Link

5) Gamestop (posted 12/30/13) Link

6) Walmart (posted 12/30/13) Link

Categories: Articles

Elizabeth Arden CEO Points To Weakness At Walmart

August 8th, 2013 No comments

Sometimes if you can connect-the-dots, it can give you a decent chance of predicting future results. Elizabeth Arden reported a dismal quarter today. The company missed earnings and sales by a mile and also guided next quarter and the full year way below Wall Street estimates.

The company in their press release said one of the key reasons the results were so poor was:

" due to weakness at one of our largest North American mass retail customers, both in terms of retail sales performance and replenishment rate" (Source Link)

The financial media later in the morning quickly worked their sources to find the identity of this un-named mass market retailer.

Wal-Mart is the (unnamed) retailer that Elizabeth Arden says ordered much less inventory than expected — @bobpisani $RDEN $WMT

- Carl Quintanilla (@carlquintanilla) August 8, 2013

CNBC’s Carl Quintanilla confirmed to me (Source Link) that their reporter Bob Pisani did actual "shoe leather" journalistic reporting to confirm that it was Walmart that was the un-named retailer. Reuters also reported the retailer was Walmart (Source Link).

Why is this a big deal? So what if Walmart ordered less Elizabeth Arden products? The nugget comes from what the CEO of Elizabeth Arden said on their earnings conference call this morning:

Largest mass retailer account in the U.S. has experienced negative retail sales trends and even worse replenishment trends. The replenishment trends actually accelerated in the fourth quarter despite improvement in retail trends..

This is not a unique situation to us or to our category. This is not a brand issue, not a fragrance category issue as we actually built market-share in this key account..we actually..successful in the remainder of our mass retailer accounts (Source Q4 2013 Elizabeth Arden Conference Call Link)

The CEO is basically saying this large account, which we now know is Walmart, is under-performing all their other mass retailers and the poor business trends are "across-the-board". The poor order rates are not just their account or the fragrance category.

If this CEO is accurate with his commentary, it is highly likely Walmart will report poor financial sales results and guidance when it reports next week on August 15th.

Categories: Articles

Amazon’s Fundamentals are Getting Worse

April 30th, 2012 3 comments

One of the most successful fundamental hedge-fund portfolio managers, Roberto Mignone of Bridger Management, once said, “When a position moves against you, don’t panic. Research.” The more I research Amazon, contrary to the recent price movement in the stock, the more I find the fundamentals are getting worse.

From Microsoft’s $605 million life-line to Barnes & Noble’s Nook business to new developments in state sales tax collection to even the temporary margin improvement in the Q1 quarter to the recent and future launches of low cost Android 4.0 (Samsung/Google/ASUS) and Apple iOS tablet competitors; all point to a weaker long-term fundamental positioning of the company.

Microsoft Giving $605 million to Barnes & Noble’s Nook Business is Bad for Amazon

Before today if you told me to give you top 5 list of news events that would be most detrimental to the fundamentals of Amazon, Barnes & Noble getting a deep pocketed strategic partner for its Nook business would have been number 2 on that list.1

And that is exactly what happened with the news of Microsoft’s investment agreement with Barnes & Noble.  If you read the SEC 8-K filing [Link], you will find Microsoft is paying $300 million for a 17.6% stake of the NewCo business (digital Nook business+College bookstore business) and an additional $305 million over the next 3-5 years for revenue sharing and technology development.

The consensus was Barnes & Noble without a strategic backer would be bankrupt within 1-2 years and be especially vulnerable to a “scorched earth” ebook price war from Amazon with the “agency” pricing model likely going away as a result of the recent DOJ actions against the publishers and Apple.

What was Amazon’s biggest legitimate opportunity to win back digital media market-share by driving Barnes & Noble out of business is now a lost cause as Nook will have the dry powder to match any price war and develop new products to compete for several years. In fact if Amazon does lower prices, all it will do is lower profit margins for all the players in the market.

One of the most interesting competitive developments in the last 2 years is on a “level pricing playing field” Barnes & Noble has been able gain significant market-share in the ebook business by out executing Amazon and simply making better products.

The company went from 0% ebook market-share to 27% in 2 years, while Amazon went from above 90% to 60%.

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”Amazon is going to have a tough time holding on to the 90 percent share of the e-book market it currently claims.” Source: CNET 2/17/10 [Link]

”Mr. Lynch said Barnes & Noble now held about 27 percent of the market, a number that publishers confirm gleefully. Amazon has at least 60 percent” Source: NYTimes 1/28/12 [Link]

“company claims about 27% of U.S. e-book title sales today, with Amazon holding 60%” Source: WSJ 4/30/12 [Link]

Amazon ironically became what Microsoft was to Apple, a lame copy-cat of Barnes & Noble’s superior engineering.

In November 2010, Barnes & Noble launched the Nook Color [launch review Link], the first successful low-cost color IPS screen tablet with a forked Android OS. It did so well that Amazon basically had to copy the device with the Kindle Fire launch in November 2011.

In June 2011, Barnes & Noble launched the Nook Simple Touch with its revolutionary infrared beam touch screen technology. It won great reviews [Link] and Amazon quickly copied it with the Kindle Touch in November 2011, finally giving up Jeff Bezos’ decree that all Kindles must have physical keyboards due to the verdict of the market-place.

And this month Barnes & Noble launched the Simple Touch GlowLight [launch review Link], which Amazon will surely copy in the months ahead. Do you see a pattern here?

The clear take-away is against a fully funded Nook business, hardware engineering innovation, prime position as the digital book-store of Windows 8 operating system, and simply being a maker of “better products,” Amazon will have a tough time re-gaining market share in the ebook business against Barnes & Noble, not even mentioning the Apple iPad iBooks store and the ramping digital self-publishing book eco-system of Apple’s iBooks Author [Link], which enables authors to create multi-media ebooks with ease.

1My number 1 on the Top 5 “bad for Amazon” list is the launch of a low cost $249-299 7-inch Apple iPad, which will probably happen later this year.

New Developments in State Sales Tax Collection

Last Friday Amazon announced [Link] it will start collecting state sales taxes in Texas starting July 1st, 2012 as a settlement of dispute from last September. This is a new near-term development. Amazon is already slated to collect sales taxes in the big states of California and Pennsylvania in September 2012 [Link] with many more states looking to legislate in the coming year. It’s only a matter of time before Amazon will lose its state sales tax non-collection advantage across the whole country.

Texas, California, and Pennsylvania alone are 24% of the U.S. population that Amazon will be forced to collect state taxes in the next 5 months. This will raise effective pricing by at least 6-8% for Amazon customers in those states. Econ 101 tells us if a company raises effective pricing 6-8%, it will hurt sales.

On the last earnings call, Amazon’s CFO was asked directly by a sell-side analyst TWICE on whether starting to collect state sales tax in New York State slowed sales. The CFO conveniently would not comment on “any specific geography” like New York State, but repeated the same refrain from the past that for 50% of Amazon’s sales the company collected some kind of VAT tax (Europe) or sales tax and the company was able to grow in the past few years.

No-one is saying Amazon will stop growing as it starts collecting state sales taxes in more states, but there is no doubt in my mind it will hurt sales growth.  Common sense tells me if a customer has to pay 6-8% more for a product, maybe he or she would be willing to pick up the product at Walmart or Target later in the day vs. waiting 2 to 5 days to get the product delivered through the mail if the pricing delta is smaller.

If a customer is ordering electronics and lives in Texas, on a level sales tax playing field, ordering from Dell.com which is based in Texas suddenly becomes a much more competitive option, along with the potential for quicker local warehouse shipping. The same can be said for NewEgg.com customers in California or B&H Photo [www.bhphoto.com] and J&R [www.jr.com] customers in New York State, all solid reputable online retailers that get a new lease on life to compete for their local in-state customers.  To say 6-8% effective increase pricing won’t impact sales growth for these reasons above, doesn’t pass the common sense test.

It’s All about the Kindle Fire and the Fundamental Prospects are Still Poor

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Last week Amazon reported Q1-12 financial results. Sales growth decelerated 100bps from Q4 from 35% y/y to 34% y/y in Q1.  The company guided Q2 revenue growth to 27% y/y at the mid-point of guidance, which would be 700bps of deceleration. Operating income was –40% y/y and Electronics+General Merchandise business decelerated from 48% y/y growth in Q4 to 43% y/y in Q1.

On the positive side, World-wide media segment accelerated from 15% y/y growth in Q4 to 19% y/y in Q1. Gross margins also improved 120bps y/y from 22.8% in Q1-11 to 24% in Q2-11.

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As this table from Amazon’s 10Q clearly shows all the profitability came from the North American business and the International business’ margins plummeted even further.

There are two drivers to the better margins in the North American business.

1) I believe for the first time in the history of Amazon, the company decided to NOT delight customers and raise prices 50-100% on select items in their Subscribe & Save business. This customer message board [Link] is filled with these pricing examples through-out Q1-12.

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Also during Q1-12 I noticed Amazon adopted the Gamestop’s shady practice of increasing videogame prices significantly couple days before a “Buy 2 Get 1 Free” sales promotion.

The simple fact is raising prices 50-100% on customers who have subscriptions isn’t likely to lead to long-term margin improvement. There will be a short-term lag as customers see the higher pricing on their credit card bills and cancel their subscriptions.

2) The second more important driver of better margin was digital media purchases by new Amazon Kindle Fire owners [Note: Kindle Fire was only released in North America]. By triangulating data-points, I estimate Amazon sold 5 million Kindle Fires in Q4-2011.2 Please read my previous article [Link] for reasons why the Kindle Fire sold well initially.

I did a survey of 10 Kindle Fire owners and asked them how many ebooks they bought in the first 3 months of ownership. The average was 3.4 ebooks. Using a blended average of $9.99 and $12.99 ebook prices from Amazon’s Kindle store I calculate an $11.49 ASP X 3.4 ebooks sold X 5 million Kindle Fires = $195 million of additional digital media revenue. That number nicely coincides with the upside in the media business vs. street expectations. Ebooks are also high margin as there is little to no cost other than bandwidth.

So the Kindle Fire is driving digital media sales and improving margins, that’s great news right? Not so fast.

In my same survey of 10 Kindle Fire owners, I asked them how many ebooks they intend to buy in months 4-6 after ownership. The average was 1.3 ebooks. The take-away is after a Kindle Fire owner first purchases the tablet, they populate it with a few ebooks in the first 3 months, but additional purchases taper off afterwards. That would be fine and dandy if Kindle Fire sold like the iPad quarter-after-quarter (Apple sold 15.4 million iPads in Q4-11 and 11.8 million iPads in Q1-12), but all the data-points show Kindle Fire sales slowed dramatically in Q1-12. I estimate Kindle Fire sold a paltry 1-1.5 million units in Q1-12.2 Again read my previous article [Link] for reasons why Kindle Fire sales slowed.

Since Amazon takes a loss on every Fire sold, the irony is drastically lower Kindle Fire sales in Q1-12 also helped Amazon’s North America margins in Q1-12.

For the reasons given above, over-extrapolating Q1-12 y/y margin improvement as something sustainable is fool’s gold as it is dependent on the continued sales success of the Kindle Fire.

Furthermore all the arguments I laid out in my March Amazon article – “Kindle Fire Conundrum” section [read it again – Link] on the weak current and future competitive positioning of the Kindle Fire are equally valid, if not more so today.

In addition to the $199-$249 7-inch Google/ASUS Android 4.0 OS tablet which is slated to come out in July and the 7-inch Apple iPad which will probably come out in the Fall, a surprising entrant I did not realize a few weeks ago is Samsung. Samsung already released  7-inch Android 4.0 $249 Kindle Fire killer on April 22, 2012.

Kindle Fire “difference in performance noticeable..much rather own [Samsung]” TechCrunch review [Link]

“fuller version of Android.. more capable device” Verge review [Link]

“Samsung Has A Tablet That’s Better Than The Kindle Fire…Ice Cream Sandwich makes a much better tablet OS than Amazon solution” Business Insider review [Link]

It is highly unlikely with greater low-cost SKU tablet competition in 2H-12 with full-featured tablet operating systems like Android 4.0 “Ice Cream Sandwich” and Apple’s iOS (there’s a reason why dumbed down Microsoft Bob software failed and we don’t use Smith Corona word-processors anymore) that Kindle Fire sales will improve. And as Kindle Fire sales stay low, you can kiss long-term digital media sales and margin improvement good-bye.

Written by @firstadopter. Follow me on Twitter [Link]

2 I estimate Kindle Fire sold 5 million units in Q4-11 and 1-1.5 million units in Q1-12 triangulating from the following data-points:

-Digitimes on 2/20/12 reported Kindle Fire shipments in Q1 fell to 1.5 million units.
-Taiwanese Economic News on 3/27/12 reported Amazon moved 5 million units in 2011 [Link]
-Texas Instruments mid-quarter conference call on 3/8/12 comments regarding new product Q4 OMAP product launch which was clearly the Kindle Fire: “customers are now rationalizing both their expectations for ongoing demand as well as the associated inventory”
-Supply chain checks from Pacific Crest and OTR show 75-90% q/q decline in component orders for Kindle devices
-Pro-rating USA Today Kindle Fire to iPad app download numbers comes out to 5-6 million Kindle Fire units [Link]
-Pro-rating ComScore’s recent 1 Kindle Fire to 10 iPad in use ratio also comes out to 6 million units if you take account some run-off in iPad 1 devices.
-Frequent sales for used Kindle Fires from Amazon at $139-179 and even Best Buy at $150 speaks ill of the demand and the return rate. Walmart also had $50 gift card sales promotion
-Barnes & Noble on a 2/21/12 conference call said their largest competitor (obviously the Kindle Fire) had a return rate of 15-25%

UPDATE: 1) IDC releases Q1 tablet report showing Kindle Fire shipments went from 4.8 million units in Q4-2011 to 700K in Q1-2012 [Link]

2) Target, the country’s second largest discount retailer, announced it will phase out and stop selling Amazon Kindles and Kindle Fires this spring [Link]

3) Ad firm Chitika issues a report showing Apple iPad has 95% market-share of tablet web-traffic vs. Kindle Fire’s 1% [Link]

4) Paulo Santos has an insightful article on how Amazon’s black & white Kindle e-reader business sales are collapsing [Link]

5) Digitimes on 5/10/12 reports according to their Taiwan sources Amazon will ship 6 million e-reader units in 2012 vs. Goldman estimate of 19.6 million [Link]

Categories: Articles

Amazon.com (AMZN) is the Secular Short of 2012

March 12th, 2012 21 comments

I believe the market is underestimating the deteriorating underlying business trends, the impact of the secular shift of physical media to digital media along with the competition risk from Apple and Google, and the weak positioning of Amazon’s hardware tablet strategy.

Uneconomic Revenue Goosed by Free Shipping Subsidization

The bull case for Amazon has always been it will continue to grow at rapid rates for the next 3-5 years and if you put some decent operating margin on the out year, you will get fantastic earnings power. However the problem with this argument is the wheels are starting to fall off the wagon.

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Back in the dot.com bubble there was a company called Kozmo.com that offered free 1 hour shipping of array of small goods like books, videos, magazines, etc. To my amazement, I tried the service and ordered a pack of gum. Within an hour someone was at my door to deliver it. The company reported amazing revenue growth. Obviously investors should have discounted that sales growth as it was an “uneconomic” business model.

Amazon is doing a similar thing by subsidizing free shipping. Anecdotally I am hearing customers who have Amazon Prime feel compelled to order small items to take advantage of the free 2-day shipping benefit. They are ordering batteries, Listerine (Link), toilet paper, water bottles, etc. all with free 2-day shipping, which is goosing Amazon’s revenue without helping their bottom line.

If you sell $1.00 of value for 99c, you will show amazing revenue growth. It’s all fine and dandy until your free shipping offering hits critical mass with take-up accelerating and the losses start ballooning. Over the past few quarters, Amazon’s operating income growth has plummeted and the % of revenue of net shipping losses (you can find these numbers deep in the 10Q) has accelerated higher from 3.8% to 5.4%. In other words, free shipping losses are increasing at a rapid clip from a loss of $562 million in Q4-2010 to $934 million in Q4-2011. In fact Amazon got stung with a stunning $2.4 billion in shipping losses in 2011.

The problem is this is an unstoppable trend as the more people use it, the more losses will pile up. To make matters worse, UPS raises shipping costs annually at the beginning of every year (+4.9% on 1/2/12). At some point, Amazon is either going to have to cut back on the free shipping benefit, which will hurt revenue growth or continue to face accelerating losses. Either choice will hurt investors’ portrayal of the economics of Amazon’s business.

Poorly Positioned in the Shift from Physical Media to Digital Media

One of the biggest trends in the past couple of decades is the shift from analogue to digital. In a similar vein, there is a huge secular shift today from physical media to digital media. People are moving from physical books, DVDs, videogame discs, and CDs to e-books, online video, digital videogame services, and iTunes.

Already the growth deceleration in physical media is showing up in the numbers. Amazon’s North America Media sales growth slowed to 8% y/y in Q4-2011. Amazon blamed poor sales of videogames as a factor. This isn’t going to get any better in Q1-2012 as NPD videogame sales were down 38% y/y in January (Link) and down 23% y/y in February (Link).

The problem for Amazon going forward is a significant portion of their current revenue is still from physical media, so they need to dominate the secular shift to digital. Unfortunately for Amazon, the elephant is the room is Apple.

In the CDs to digital music shift, the game is already over with the power of Apple’s iTunes/iPod ecosystem. Amazon has no chance to compete. In the DVDs to digital movies shift, Apple already has 75% market share of all movies bought online (according to a Hollywood source Link) and this is even before Apple has launched a true Apple branded TV which is slated to come out within a year.

Amazon doesn’t really have a digital gaming download strategy (other than a small PC games download business) and will be locked out in the future when/if Microsoft or Sony goes digital only with the next generation consoles. Also as more interactive game spending goes purely digital to MMOs, Facebook, and tablets, Amazon market share of videogame business will continue to decline.

In terms of e-books, Amazon has dominated this business due to the success of Kindle e-readers in the past few years. Unfortunately for Amazon, this too is now significantly at risk as the world is moving away from dedicated e-readers and to full featured tablets. Taiwan based E Ink Holding which provides black and white e-ink displays and counts Amazon as a large customer reported December 2011 revenue down 57% y/y (Link).

The Kindle Fire Conundrum

So if the world is moving to tablets to consume digital media, all of Amazon’s marbles are now put on the success of the Kindle Fire tablet. I was actually a day one buyer of the Kindle Fire. I was excited at the price point and entranced by the ultra-fast Silk web browsing marketing line-item. Within a couple of hours of using it, it was back in the box and on its way back to Amazon for a refund.

The Kindle Fire tablet is shoddily constructed, has no volume buttons, got uncomfortably warm after some use, and worst of all unenjoyable to use. I tried the web browser and it was very slow compared to iPad, Touchpad, and even the Nook Tablet I tried in the store. Netflix didn’t work well (Engadget review saying Kindle Fire Netflix app is choppy and worse than the Nook Tablet version Link). The operating system is a glorified app loader carousel and has a tiny sub-set of the functionality of Apple’s iOS and Android 4.0 “Ice Cream” sandwich.

I was not alone in my experience. 10 people I knew who bought the Amazon Fire tablet returned it within a week. 100% of people I know who have previously used an iPad in the past and bought a Kindle Fire wound up returning the Kindle Fire. That is an utterly damning data-point.

I believe that Kindle Fire initially did sell well in the first few weeks after release, but after word-of-mouth got around sales decelerated and imploded into Q1-2012. Many of the data-points that I triangulated from other companies and sources bear this out.

1. Apple’s CEO said on their earnings call and at conferences there was zero impact on the trajectory of their iPad sales after Kindle Fire was launched. He said “our customers won’t be satisfied with “limited function” tablet” and he has heard customers of a competitor [Kindle Fire] say “I got a good deal… but I hate it”

2. Barnes and Noble management on their conference call heard their biggest competitor [obviously Kindle Fire] “had returns rate 15-25%”

3. Sandisk management on their conference call pointed out weakness in the 8GB flash size product [the size of Kindle Fire’s flash memory].

4. Digitimes on 2/20/12 reported Kindle Fire shipments plummeted to 1.5 million units in Q1-2012. This is even worse 3 million units forecasted just 1 month before on 1/20/12 Link

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5. Walmart offered a $50 free gift card on Kindle Fire purchases 2/5-2/14 (Link) further supporting the inventory overhang theory. Staples did the same later in February with a $25 gift card promotion (Link). Moreover every time I visit my local Target there are piles and piles of Kindle Fire and Kindle e-reader inventory.

6. Texas Instruments on their mid-quarter guidance cut conference call on 3/8/12 (Link):

”whenever there’s a new product introduction by a customer, there’s also an associated one-time surge of revenue as those customers fill their channels with product. So although we had anticipated lower sequential revenue associated with that [non-recurrence] of the fourth quarter channel fill, demand for OMAP is lower than what we had originally expected as our customers are now rationalizing both their expectations for ongoing demand as well as the associated inventory.”

 

The most ballyhooed Texas Instrument OMAP app processor new product design win in Q4-2011 was the Kindle Fire. And now Texas Instruments is saying the channel got stuffed and needs to get “rationalized.”

And it’s going to get worse. Apple is reportedly going to launch a 7-8 inch tablet form factor iPad at a lower price point later this year. Google/ASUS is reportedly going to launch a 7” tablet in the coming months for $199-249 to compete directly with the Amazon Fire tablet. This new tablet will have a full-featured Android 4.0 “Ice Cream Sandwich” OS and an Nvidia Tegra 3 processor which will provide a much better user experience to consumers. I’ve been using Android 4.0 on my HP Touchpad and it’s fantastic, snappy, and pretty, all things I can’t say about the Fire.

In fact Amazon is stuck between in a rock and hard place as they built the Fire Tablet on top of Google’s Android OS. Building your device on someone else’s OS puts you at risk of being cut out in the future revisions and upgrades. A very precarious situation amplified by the fact Google is probably not happy Amazon cut out Google’s Android Market (now called Play) on their device.

If Amazon’s Fire tablet doesn’t catch on, tablet digital media sales will be dominated by Apple’s AppStore and Google’s Android Market/Play store. People like to have one device that has all their music, photos, videos, games, apps, and movies. Apple and Google hold the cards and will get the 30% sales commission tablet store spoils while Amazon withers in the dust.

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To add insult to injury the success of Apple’s iPad and iPhone products are taking large consumer electronics dollar market-share away from Amazon. iPad and iPhone sales have grown exponentially over the last few quarters while Amazon’s electronics and other revenue segment have suffered in comparison. Once again this is a trend that is not likely to reverse any time soon given the problems of the Kindle Fire and the high customer satisfaction and extreme stickiness of the Apple ecosystem (iCloud, iOS AppStore, iTunes, iPhoto, Apple TV, iPod, FaceTime etc.)

Amazon isn’t oblivious to the competitive issues at stake with the shift to digital media and the rise of tablets. Guess how many iPads and iPhones Amazon sells directly on their site (not third-party sellers)? Zero. That’s right, ZERO.

At the close of trading on Friday, March 9th Amazon stock price was $184.32 trading at a premium multiple of 143Xs 2012 earnings.

What multiple do you give a business that is goosing revenue with uneconomic free shipping subsidization?

What multiple do you give a business that is directly in the cross-hairs of Apple in the shift to digital media after what Apple did to Nokia, Research in Motion, HP, and Palm?

What multiple do you give a business that put its future on a shoddily built tablet that is failing in the market place?

My answer is: a much lower multiple.

Written by @firstadopter. Follow me on Twitter (Link)

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1. Many Amazon bulls keep saying “Don’t worry, Jeff Bezos plays long-term. He will figure it out.” This reminds me of what people used to say about Reed Hastings at Netflix last year as NFLX stock went from $304 to $62. No matter how great a CEO Hastings was before, it didn’t help the fact his content costs went from a sweet-heart $30 million a year deal with Starz where Netflix got quality Disney and Sony movies for a pittance to paying $1 billion for Gossip Girl. Similar perilous secular industry trends are facing Amazon, even great CEOs can stumble.

2. I didn’t even cover the long-term issue of state sales taxes. Currently analysts’ estimate Amazon has a 10% pricing advantage after no state sales tax and shipping vs. brick and mortar stores. This advantage goes to low single digits % over the next 1-3 years as states and/or Congress legislate and come to agreement with Amazon to collect state taxes. I’m of the belief this will help level the playing field and hurt Amazon’s revenue growth as there is some value to customers of having a store-front to try new products out, give service, and returns. The best example of this is Apple retail stores of course.

3. I also did not write about Amazon web services. Compared to the arguments laid out above for Amazon’s core businesses, web services is still a small single digit percentage of revenue (Link) and is suffering some issues of its own: 1) Zynga decides to compete after being Amazon’s largest web services customer (Link) 2) Sony switches some business away from Amazon to RackSpace after security breach (Link) 3) More price competition from Google Link 4) HP to compete in the coming months (Link)

Categories: Articles

Crystal Clear Waters: SodaStream (SODA) Rollout Growth Story

December 1st, 2011 1 comment

Proven Track Record of Blowing out Street Estimates the Last 4 Quarters

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Source: Motley Fool (Link), Yahoo Finance

U.S. Store Rollout up More Than Triple-Digits Year-over-year to 9550 stores

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Source: Ad Age full article link

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1100 new Target stores, 1140 new Staples stores, 240 new Costco stores all rolled-out in the past month. The CEO was quoted on CNBC with Herb Greenberg that Walmart “is coming”. The CEO also said at J.P. Morgan conference on 11/30/11 “retailers like Trader Joes and Whole Foods.. You will start seeing things like that in the next year or so”

U.S. Store Growth led to Triple-Digit Sales Growth in Past and Likely the Future with Recent Store Add Acceleration of +45% q/q
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New Un-penetrated Countries Will Drive Years of Future Growth
SodaStream household penetration in Sweden is over 25% with several European countries in the range of 17-25%. Household penetration in the U.S. is negligible. The company just launched in Japan (press release link) in October 2011 and announced it will launch in Brazil in Q1 2012 (press release link). Changes in the corporate presentation also strong imply an upcoming launch in India (my analysis link).

CEO quote from J.P. Morgan conference 11/30/11 on U.S. business trends: “bottom-line sales are triple digit growth in the U.S. Consumables are going through the roof. So we are very excited about the prospects of a strong holiday and strong long-term growth in the U.S.”

It’s a Great Product that Saves You a Ton of Money
I use my SodaStream to make me sparkling water and soda about 3 times a day. If you drink sparkling water, buying a Sodastream is a no-brainer. Read my article (link) on how you can get an amazing 16.6 cents per seltzer liter. It also helps save the environment with less plastic bottles wasted (link), costs less (link), and is better for you nutritionally (link).

The following are some reviews on the Sodastream model I own – the Genesis. You can read all 46 customer reviews here: (Bed Bath Beyond link)

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Consumables Growth is Strong and Average Spend per U.S. Consumer Bodes Well for Future
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U.S. consumable growth is stunning (look above at CO2 refills y/y etc.). The CEO said on 11/30/11 that average spending per U.S. consumer is $65/year much higher than world-wide average of $34/year, which bodes well for the future as the U.S. is only 30% of SodaStream’s revenue and growing at triple-digit annual rates.

Awesome Business Model and Barriers of Entry
Not only does SodaStream make money up-front selling soda-makers, the awesome part of the business model is the 80% gross margins (DB analyst estimate) it gets from CO2 refill exchange canister business.

Along with the 9550 stores in the U.S. that sell SodaStream sodamakers, 50% of them (4785 stores) participate in the CO2 refill exchange business. Stores love this as it drives repeat customer traffic. This distribution network is a huge barrier of entry for competitors as stores are unlikely to offer a second CO2 re-fill brand at their customer service desks. Moreover SodaStream has 5 million CO2 re-fill cylinders in circulation manufactured at $10 a piece, which represents a significant capital investment. The CO2 re-fill valve is also patented.

In developed markets where there is well-financed competition such as Sweden, SodaStream still dominates at over 80% market-share due to its brand, first-mover advantage, and distribution network.

Europe Revenue Risk
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I believe the developed European market macro risk is over-stated. The developed markets in Europe (look above) are primarily 75%+ consumable revenue streams for SodaStream. Even if the macro situation worsens, it is high unlikely a family will cut down on $15 consumable CO2 re-fill every few months when in fact SodaStream saves them a ton of money vs. buying bottles. It’s a stretch to say any family will stop drinking sparkling water and go back to tap water to save that $15.

Europe growth has been overall strong, but even if it goes down to flat or single-digits, the triple digit growth in the U.S (already 30% of revenue) and new markets such as Japan and Brazil still give the company years of 20%+ growth runway.

Valuation and Short Interest
Most of Wall Street estimates for 2012 EPS are around $2.00 in USD earnings (Note Yahoo Finance estimates are in euros). Using the $2 number, the stock at today’s close of $29.85 is trading at 12.8Xs 2012 EPS ex-cash growing sales at 39% y/y in the last quarter.

Using the latest Nasdaq 11/15/11 short-sale data (link), short interest has increased 12% in the previous 2 weeks to 7,478,030 shares. That means roughly 54% of the float is short. High short interest to float numbers such as this have preceded massive short covering squeezes of 50-70% upward stock price moves in as little as 4 weeks (Examples: OCZ and BKS in the past 2 months).

Long-term annual targets
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Summary
I believe SodaStream is the best “early innings” rollout growth story in the market. They make a great product that saves people money and is a proven household penetration winner world-wide. 

The company has blown out Wall Street estimates the last 4 quarters, accelerated U.S. store distribution 100%+ y/y +45% q/q, launched in Japan in October, and will launch in Brazil in Q1 2012. For all these reasons including the CEO repeatedly being quoted on Bloomberg, CNBC, and at Wall Street conferences about being “very excited about the strong holiday” I believe it’s highly likely SodaStream will post strong Q4 results.

Moreover the company will likely give strong 2012 guidance of at least 20% revenue growth and EPS growth of 25% as the CEO repeats those long-term annual growth targets on a monthly basis and in corporate presentations everywhere he goes.

Research Links
1. Official company Powerpoint presentation September 2011 (link)
2. J.P. Morgan conference 11/30/11 Powerpoint presentation (link)
3. My metrics financial model spreadsheet (link)

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