Tag: Stocks

The Fundamentals are in the Footnotes

The whole point of fundamental research or value investing or whatever you want to call it is to get an edge by looking a little deeper than others are looking. This is why you won’t get very far by using stock screeners.

Stock Research on Onverstock.com 

We recently published a stock report on the Fundamental Finance Playbook about Overstock.com. The article is a deep dive into the current status of the company’s online retail business. We try to figure out if the business is, in fact, in a turnaround as management claims, or if the company is at risk of running out of cash.

Previously, the management had stated that they were trying to sell the online retail business but so far nothing has materialized. During our research phase we noticed that during the last quarter, consulting fees on the corporate level had increased significantly. By corporate level, we mean not connected to the operations of the online retail business nor the blockchain ventures.

Overstock engaged Guggenheim in 2018 to explore strategic options for the retail business and find possible buyers. If the consulting expenses are mostly in the “Other” business segment and neither in the retail operations nor the tZero operations, it is plausible that Overstock is already in advance negotiations with potential buyers through Guggenheim.

What that indicated to us, was that there was a possibility that Overstock was already working with Guggenheim Securities, the company that Overstock employed to find buyers, on advanced negotiations with possible buyers. These kinds of transactions usually require heavy due diligence, so it would be quite plausible that costs would ramp up like this.

Two Potential Acquirers 

A week after we published, Patrick Byrne, Chairman and CEO of Overstock said in an interview with CNN that the company was in negotiations with two potential acquirers. It remains to be seen if anything materializes from this, but it goes to show that sometimes the fundamental facts are buried in the footnotes.

Is Netflix Worth its Valuation?

Netflix has grown to become a $180 billion dollar Market Cap company. If you add their net debt, that adds up to a total capitalization – aka Enterprise Value – of $192 Billion.  Not bad for a company founded in 1997. Not bad at all.

Price Per Potential Subscriber

If you divide the $192 billion Enterprise Value by the 236 million people that populate the United States of America, you arrive at a value of about $815 per each compatriot of Wilmont Reed Hastings Jr. This is where you might point out that Netflix is a global brand with a global audience. Well, that computation, my friend, would allocate $25 worth of Netflix per human inhabitant of the earth.

NFLX EV/EBITDA Multiple

In the last twelve months, Netflix’s Earnings Before Interest, Tax, Depreciation and Amortization was $2 billion. That means that Netflix is trading at a multiple of 96 times its trailing EBITDA. Disney, by comparison, is trading at a multiple of 11.

So, imagine this scenario: For the next 10 years, Netflix grows its EBITDA by an annual rate of 24.19%. At the end of the tenth year, Netflix’s EBITDA will have reached $17.5 billion. That’s a very healthy growth. But for this to happen, paid subscriptions would have to be close to 1 billion.

Needless to say, a Netflix with 1 billion subscribers does not have the same growth potential as a Netflix with 130 million paid subscribers. What if Netflix was now trading at the same multiple as Disney is trading at today? That would mean that after ten years the enterprise value of Netflix would be $192 billion.

Price is what you pay for. Value is what you get.