Tuesday, January 29, 2013


We thought to touch on a few names.  The following lengthy comments are based on our initial observations and not on extensive research and due diligence, which may be conducted at a later time.  We have also provided a brief update on AVID at the end of this post. 

Netflix (NFLX)

As everyone knows, Netflix (NFLX) has skyrocketed "to the moon", more than tripling since Oct. '12.  Carl Icahn's move as an 'activist' shareholder kick started the rally.  Of course, he did not take as much risk as other shareholders did once they jumped on that bandwagon, as most of his position in NFLX is in the form of call options.  However, again, the ones that took the risk have certainly reaped huge returns. 

NFLX's favorable Q4 earnings results also helped the situation.  In addition, given that shorted shares of NFLX represented more than 25% of the float, Icahn's move and the better than expected earnings created a very nice short squeeze, pushing the stock even higher.  Now, we think NFLX is overvalued.

Whether it is yet 'safe' to short it remains to be seen as it takes some time for the impact of a short squeeze to 'evaporate'.  However, the huge $60+ gap, or 60%, created will more than likely have to be filled, increasing the chances of a pullback.  Another indicator may be the volume.  It has averaged nearly 4x its daily average in four out of the last five trading days, indicating a lot of short covering.  Easing of the volume while stock is still going up slightly may indicate that the short covering is coming to an end.  We note that this stock is a risky one.  Although the Company remains at the mercy of content providers with continuously less control over its pricing, the emotional attachment that many retail investors have to this stock does create a risk for the doubters. 

On the fundamental side, we note that while NFLX's streaming subscriber growth came in better than expected, its DVD segment continued to decline, which was not surprising.  Various studies indicate that the DVD market was flat Y/Y in 2012, making a Y/Y decline in 2013 and beyond very likely.  In FY '12, 31% of NFLX's total revenues were from the DVD segment.  Its US DVD business has a 45% - 50% margin while the streaming business margin is at around 20%.  The Company is apparently taking steps to slow down the decline in DVDs.  In fact, we recently received a marketing email from NFLX for its DVDs; the first time in a very very long time.  Of course, similar to many other streaming subscribers, we automatically deleted the email.  We note that while paid DVD subs declined 27% Y/Y in FY '12, paid streaming subs went up only 26%.

By the way, NFLX raised another $500MM so it can pay off some of its near term debt and also make some initial payments for the ever more expensive content.  The good Q4 results were very timely, in our opinion.

NFLX is currently trading at 61.7x FY '13 EPS, which, based on a 5-year CAGR, represents a PEG of 31.1!  Coinstar (CSTR), the maker of Redbox DVD kiosks, is trading at only 10.2x forward EPS, representing a mere 0.61 PEG.  Also, CSTR's P/S is below 1.0.  Some of this valuation discount is based on the fact that most of CSTR's revenues come from the mature and no-longer growing DVD market.  However, we note that the DVD kiosk market is a niche which will likely not decline this year or next.  In addition, CSTR has partnered with Verizon to launch Redbox Instant, which is basically a content streaming service (only movies for now), accessible on TVs, desktops, and mobile products.  Redbox Instant also does not face the risk of too much upfront payment or basically inventory for content as does NFLX.  Studios are paid based on CSTR's sub count and demand for titles.  It appears that CSTR's Redbox Instant, a potential competitor to NFLX on the content side and pricing, is valued at $0.00 within CSTR's stock price.  We are not necessarily being bullish on CSTR.  We are just demonstrating how overvalued NFLX is.  Lastly, and not surprisingly, based on a variety of valuation multiples, NFLX is also trading at a very high and not necessarily justifiable premium to cable and satellite companies such as Comcast (CMCSA), Time Warner Cable (TWC), DirecTV (DTV), and Dish (DISH). 

Blucora (BCOR)

Blucora (BCOR), formerly known as Infospace, provides Internet search services along with tax preparation solutions (through the acquisition of TaxAct in Jan. '12).  By doing a back of the envelope sum-of-parts valuation, BCOR appears to be undervalued.  We think it could be worth close to $19/sh.

Both of its businesses are profitable.  Its search segment top-line has grown impressively the last 12 - 24 months, driven mainly by bringing in new partners and performance of Google (GOOG), which is one of BCOR's two main partners.  The other is Yahoo! (YHOO).  With revenue growth of around 12.5% (a discount to the market's sentiment on search growth in CY '13), a 15% EBITDA margin and a conservative EBITDA multiple of 6.0, we think BCOR's search segment (excl. net cash) can be valued at approx. $345MM. 

The tax preparation segment is very seasonal but much more profitable.  Although a slight loss is expected in Q4 '12 (due to seasonality), we think that segment will generate around $44MM in EBITDA in FY '13.  Other players in this space, such as H&R Block (HRB) and Intuit (INTU), with lower EBITDA margins, are trading at 8x and 12x forward EBITDA, respectively.  Being conservative and applying EBITDA multiple of 8.0 to BCOR's tax services segment, gives us a valuation of $352MM for that segment.  We note that 8x EBITDA is only slightly above the 7.6x EBITDA that the Company paid for the business in January of last year.  In addition, there may be a slight upside to tax preparation top-line growth given that Congress recently passed the American Taxpayer Relief Act.  The ever so slow improvement of the state of employment during the last 12 months, which resulted in more people receiving paychecks, therefore required to file taxes, may also help BCOR's tax preparation segment revenues. 

Together, the two segments result in an EV of $697MM.  With net cash of $76.1MM on BCOR's balance sheet, the Company's valuation could be around $775MM or close to $19/sh, representing around a 26% upside.

BCOR will be reporting Q4 results on 2/15.  Given the Q4 numbers from GOOG and YHOO, BCOR's search revenue will be close to $93MM.  Revenues from tax services will likely be around $1MM for the quarter.  Management guided for EBITDA of $10MM - $11MM in Q4, which we think will be met.

The stock has traded within the range of $10.73 - $18.63 during the last 12 months.  After going above $18.00, it came down abruptly to $15.00 and further down to $14.00 mainly due to the Company's disappointing Q4 guidance.  The stock closed at $15.13 today.  The recent upturn was driven mainly by GOOG and YHOO earnings results, along with seasonally positive expectations regarding the tax season which is in the current quarter, Q1. 

IAC/InterActiveCorp (IACI)

IAC (IACI), which basically consists of a variety of Internet companies, appears to be undervalued and at $40.65, the stock is not far from its 52-week low of $38.20.  It is trading at only 5.2x FY '13 EBITDA.  We think IACI could be worth $52.50/sh, or 7x FY '13 EBITDA plus net cash of approx. $545MM.  The Company is profitable and cash flow positive.  It is also experiencing organic top-line growth in addition to growth via acquisitions.  While it is heavily dependent on big players in the search space such as GOOG, we think it can maintain its agreements with GOOG.  In addition, our estimates do take into account the possibility of limited margin expansion if GOOG were to increase its prices.  This is from our initial look at IACI.  We will provide updates as we conduct due diligence and complete a more detailed model.  We note IACI distributes quarterly dividends, which are currently yielding 2.4%.

IAC's various Internet businesses are grouped into four segments: search & applications, Match, Local, and Media & Other.
From a macro standpoint, even with basically one dominant player in the Internet search space, GOOG, other smaller players continue to benefit as the overall space keeps growing.  What initially attracted us to IACI was that we realized it takes time to think about the right keywords to search or 'Google' for.  So, obviously on our smartphone, which we now utilize much more often than our desktop or laptop, we started typing in simple questions.  The results which we found simple, straight to the point and of course most helpful were the ones from Ask.com and ehow.com.  Ask.com is one of the companies owned by IACI.  eHow.com is owned by Demand Media (DMD), which we also view as attractive but not as cheap as IACI.  We think this type of search is becoming more popular every day.  IACI consolidates data from a variety of sources to create a useful Ask.com database.  And last year it bought About.com which we believe can help improve answers to questions asked in Ask.com, which may also help expand margins a bit.  We note that there is a lot of competition in this space (incl. DMD), but IACI appears to be doing just fine.  Dictionary.com is another one that we see come up often when we search for definition of words or phrases.  It is also owned by IACI.

The Match segment is basically online dating.  Most of its revenues is derived from subscription to the popular Match.com online dating services site, and also from ads on that site.  Some revenues also come from a European version of Match.com, Meetic.  The Company also owns about one fifth of an online matchmaking service provider in China.  Revenue growth of Match will likely not be very robust; however, it is the Company's most profitable segment.  Slowdown in revenue growth is due mainly to competition such as Facebook (FB) and the fact that the online dating space has pretty much become a mature market.  However, we think that there is a chance where some FB users would rather pay a bit to be on Match.com and find new 'friends' rather than have their private information available to their FB friends, a high percentage of which are likely not true friends.  As FB friends continue to get more tools to 'investigate' each other's behavior (such as Graph Search), Match's slightly more private service may become attractive again for users.  We think FB's performance over the last couple of months has impacted IACI's stock negatively. 

The Local segment consists of marketplaces connecting people with local service professionals.  HomeAdvisor.com is one of its main websites.  It helps many find home improvement advice and services from local professionals.  Given what many believe to be the recovery or bounce from the bottom within the real estate market, such a marketplace could get high traffic.  Revenues are generated mainly from local businesses paying fees to be listed on the site.  IACI also gets paid if a user decided to schedule an appointment with one of the local businesses via the site.  According to the Company, IACI gets paid no matter if the user receives the business' service and pays for it or not.  There is a lot of competition in this space.  It includes Yelp (YELP) and now FB.  But the space is also growing so most players will likely benefit.

And finally, the Media & Other segment includes CollegeHumor Media, and Newsweek & The Daily Beast.  It also has Vimeo, where users watch, share and upload video.  This segment is burning cash this year (mainly due to restructuring related to Newsweek) and will most likely do so next year, although a bit less, which may help create upside to overall margins. 

AVID Update ... 

AVID increased 17%+ after we posted our thoughts on it in early Dec.  However, it has declined approx. 10% recently.  We think the pullback was partially due to profit-taking and minimizing risk going into Q4 earnings which will be released on 2/26.  We note that even with the recent decline, the stock has slightly outperformed S&P 500 since 12/10.  

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