A brief valuation comparison

Investment Analysis Clubs Saul’s Investing Discussions
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With the recent drop in prices I’ve recalculated some quick valuations. Something to keep in mind. Many of our stocks are back at where they were at the end of may. We had an incredible run up in June, and now we are having an incredible run down. We have already covered the business case extensively for all these stocks. I’m just focusing on their relative valuations. None of our stocks have become “cheap” . I haven’t run the numbers but I think they are all more expensive on a valuation basis then 6 months ago. I don’t think this is a back up the truck moment, more of a correction for our crazy june. I could be totally wrong.

A note on my numbers. I just took the EV/S from the last time I calculated them which were mostly within the last couple of weeks.

Zuo - EV/S down from 20 to 16, forward EV/S down from 14 to 10. Likely ~ 40% revenue growth Cash flow negative. Still too expensive for what it is.

VCEL - EV/S down from 6.4 to 5.2, forward EV/S from 6 to 4.8. ~30 % revenue growth. Probable cash flow positive. Looking like an attractive add

OKTA - EV/S down from 17.5 to 15.5, forward from 14 to 12.5. Likely >50% revenue growth. Operating cash flow positive. Starting to look attractive

AYX- EV/S at 13, forward 10. Likely >40% revenue growth, cash flow positive. I bought a bunch when it was at 31 just recently. If i didn’t have a position I would open one at this price.

NTNX- EV/S down from 8 to 6. Revenue growth is going to stall but margins are going to improve while they transition away from hardware pass through. Just signed the air force for a huge contract. Operating positive, likely FCF positive soon. I bought some.

SHOP- EV/S 17 forward 13.5. Likely >50% revenue growth . Slightly Cash flow negative Back at june 1st levels. Not a particularly amazing deal but not terrible either.

PVTL - EV/S around 10, up from 8 last time i looked. Forward EV/S probably around 9. I’d buy in if I didn’t own a large position already.

MDB - just back at where it was at the beginning of june. I bought some then because of a solid earnings report. EV/S ~12.5
Best,
Ethan

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iQiyi (IQ) has taken a guilt-by-association fall due to likely too fast of a runuo but also the Trade war fud.

Given IQ is primarily a China-focused business they wont be impacted by trade.

Current around $31, which is still almost 100% from IPO but down from mid-40s, and their volatility is not for the faint of heart.

Normally, the Chinese ADRs get a P/S discount compared to US peers, but as a reference point NFLX is around 12-13 p/s, but i am not certain what their forward p/s would be.

IQ did approx $750m in Q1 and forecasted $950m in Q2 and tend based on their 50%+ growth in ad revenue and 60%+ growth in subscription revenue they are easily on pace for $4b for 2018. At current $22b market cap that is a forward p/s of 5-6.

I dont see it staying that low, eapecially after they announce q2 and q3 ERs in likely Aug and Nov, respectively. Their may be more short-term pain, but obviously hard to accurately predict a bottom and when it spikes up it tends to do so quickly.

Dreamer

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IQ isn’t likely to become the Netflix of China as it isn’t the sole operator and is confined to China (as opposed to the whole world minus China).

China has IQ, Tencent’s video and Alibaba’s video offering; plus a host of other smaller companies.

IQ and Tencent are the big dogs in this space; but this isn’t a monopolistic situation as competition is fierce and costs are rising rapidly.

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IQ faces a host of competitors throughout China. I don’t understand how local cable providers obtain content, but I watch movies in English (mostly American movies, but some foreign with English dubbed in) when I am at our condo in Guilin.

Cable providers in China sell package deals, much the same as they do here. In most cases you do not get the option for streaming on demand, it’s more like programming on a schedule, a few movies in rotation. I also don’t know what package options are available to us, either my wife or her brother decides our subscription level. But there might be two or three channels that provide some English language programming, usually not exclusively, English language movies are in rotation with Chinese language. Nevertheless, one should not think that IQ is offering unique without substantial competition.

In my opinion, it’s going to be all about content and price. If IQ can build a substantial content library that appeals to a large segment of the Chinese population and offer a streaming service at a price that people are willing to pay in addition to what they are already paying for cable service, they’ve got a chance at establishing a substantial market. But that’s a big “if”.

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IQ doesnt have to be netflix.

$3 per subscriber.
They have 60m now on a country 4x size of US, around 1.3b people.

My 3-4 year sub target for IQ is 240m subs. That is $8.6b in revenues assumong they dont raise prices on the fastest growing and largest middle class in world. They also happen to have fastest hrowth of mobile usage in world, on top of fact 40% of country is still getting online in coming months/years.

Unlike nflx they also had current annual ad revenue of approx $1.3b, which grew over 50% y/y in most recent Q. Lets assume the ad rev, from approx 450 MAUs, only grows 25% for rest of year, and you have about $1.6b in ad rev for 2018.

If they add zero subscribers rest of year they are at $1.9b in suscriber rev for full 2018, for a total of $3.5b if their business peaks today, which isnt likely. That is where i get $4b for 2018.

If you allow them only modest growth in 2019 of adding 20m subscribers (33% growth down from 60%+) and 25% ad rev growth (down from 50% current growth) you would have $2.9b in sub rev and $2b in ad rev. They also make a smalll amount in licensing which i have just been ignoring to make the modeling simple. That is a $5b rev company at end of 2019 if their growth slows dramatically.

They put premium content behind pay wall to entice those 450m MAUs to becomes subscribers if they arent yet. The CEO is laser focused on building brand and content to bring in and retain more users, and likens his goals more to being disney (from brand perspective) than being just a streaming company ala netflix model.

Netflix has about 7x the market cap with only double the # of subscribers and no secondary ad rev stream (yet).

Per TTD ceo jeff green, china is more progressive in the booming ctv trend than even the US. All the trends and numbers seem to be positive for iQiyi, regardless of competition. I dont expect 600-700m people to watch/subscribe to 1 streaming service in 3-4 years.

Dreamer

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China has around 455m households in a few years IF the internet penetration rate climbs to 90%, the total addressable market will be 410m households. Currently, IQ has a 40% market share of video streaming (Tencent has the same), so if we extrapolate this into the future, IQ will only be able to grab around 165m subscribers. Logically, any models should be based on this figure.

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that people are willing to pay in addition to what they are already paying for cable service,

People will cut cords and people will keep cable and pay for streaming svcs, and some will only opt for cable.

And then there is the largest mobile-using population on the planet.

Dont think they will all be watching cable tv on their phones. ATT bought TW for a reason. Disney buying fox for same. They are entering streaming. CBS already started. Amazon prime. Hulu. SlingTV. YouTubeTV. Apple tvs. Nvidia shields. Android tvs and Rokus.

Going to be plenty of streaming in US and in China and rest or world eventually.

Then you have 5g. Etc etc…

Dreamer

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Mobile. Households are one measure, but you forgot mobile. Both for ad revenue and for addl subscriptions. Plus expansion to other asian countries and beyond. (Or is only netflix allowed to grow internationally?)

Plus raising sub fees over time.

What stocks do you like, then?

Dreamer

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Dreamer, am not sure a Chinese streaming company with Chinese content will succeed overseas but who knows!?

My portfolio is invested in what I consider “moaty” long-term compounders, businesses I feel will grow over the next few years.

I have a heavy exposure to China and digital payments.

Portfolio has 27 holdings, 5% in a few, rest are 3-4% positions.

Below are some of my holdings

Alibaba
Baidu
Tencent
Weibo
TAL Education
Autohome
Facebook
Alphabet
Visa
Mastercard
Paypal
WorldPay
Fleetcor
Splunk
Shopify
Workday
Mercadolibre
Discovery Communications
Amazon
HDFC Bank
Booking Holdings

As a whole, my portfolio is expected to increase EPS by around 22% p.a. over next 4-5 years and its year-end PE is 29. As long as these businesses keep growing at a healthy clip, I will hold on, However, if growth slows down, I will close position and move on.

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Nice port and i like a lot of those companies, if not their stocks.

Not sure how Autohome has a moat with Uxin IPO coming and BitAuto. Seems a lot like your argument of iq, tencent video, and youku making streaming crowded.

My point is anyone can nitpick just about any stock with “If’s”.

I am not worried about holding for 4-5 years, but i might.

Good luck to you.

Dreamer

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Thanks!

I make mistakes and this is why I keep position size small (max. 5% at point of entry).

In my view, ATHM has a narrow moat. Its dealers (around 35,000) are not going anywhere as ATHM has the traffic, and it provides leads, not to mention insurance and auto financing options to customers. ATHM is majority owned by Ping An and its guy is running ATHM. Ping An wants ATHM to succeed because it sells insurance and auto financing through it.

Company’s revenues and earnings are surging and analysts expect CAGR of 30%pa over next few years. Stock is currently trading at PEG ratio of 1, which is why I have taken a starter position of 3%

If business continues to grow rapidly, will sit tight. If not, will exit.

Good luck to you as well.

All the best.

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Dreamer,
As I’ve not been following IQ and have no position in it, I was unaware of the subscription rate and the efforts to build content as you noted. IMO, as noted in my previous post, these two factors are make or break for IQ. It appears the CEO is well aware of it.

And true, I also ignored mobile. One of the reasons mobile is growing at such an astounding rate in China is that it’s cheap. Data rates in China are very low irrespective of provider. The mobile market in China does not resemble the US. People buy phones and tablets wherever they want, even street vendors. They get a phone number and sim card from a carrier. They pre-pay for service, data services are much less than phone services and with apps like Weixin (WeChat), the Chinese Facebook which provides video messaging much like Skype (free on wifi), there’s little motivation to pay for anything above minimal phone service.

I’ve been ignoring all Chinese investments because of what I know to be true about the way the Chinese operate businesses. Shareholders are low on the list of priorities for most Chinese executives. Only when there is alignment between the shareholders interest and their own will you see favorable actions for the investor community. Fortunately, this is largely true most of the time, but it’s by accident rather than intention. The only fiduciary responsibility a Chinese executive has is to his inner circle.

And then there’s the government. President Xi just blocked HBO.com because John Oliver recently highlighted his anger about a comparison to Winnie the Pooh. Childish, IMO. I could say more, but out of respect Saul, I don’t want to make this a political commentary. Just saying a few mistakes in content selection and IQ could be permanently blocked in a heartbeat, no questions asked.

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IQ could be permanently blocked in a heartbeat, no questions asked.

Lets not make this political. Would suck if you were a Harley stock owner thanks to POTUS tweets. Or the hit AMZN took earlier in year from same source.

Since i actually research the stocks I discuss, i am already aware iQiyi employs AI and dedicated team to self-censor for that very reason.

TTD and every other US company operating in china is in for a world of hurt if chinese spend no money.

Dreamer

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Dreamer,
You make your decisions for your reasons. I make my decisions for my reasons. There’s no reason for us to agree on investment decisions. I wish you well with your investments. I’ve just made a blanket decision to refrain from any Chinese investments. You can boil it down to Chinese business practices and potential government interference of a stifling nature.

I have reevaluated my position a number of times. This one’s different . . . I always come back to the same reasons. Yeah, I may be missing out on the burgeoning growth of the Chinese middle class while the US middle class is shrinking, but I need to control the risks I can control, I seem to be doing OK invested in American (and Canadian) companies for now.

Maybe I’ll change my mind in a (insert time period here).

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Dreamer is hitting the spot on insight in IQ imo. For some background - Im an American Born Chinese and my family is in Hong Kong / China. I’ve lived in china for about 6 years until recently.

  1. Cable doesnt exist in China the way we think of it in the USA, that entire ‘generation’ was skipped. Wealthy Chinese had satellite but it was unreliable and not easy to use. During that period internet service providers were leap frogging satellite in all areas of market share, price, speed, etc because it was an essential business need to have high speed cheap internet to conduct business domestically and internationally.

  2. China’s strategy has been and will be to grow/support domestic companies to compete on a global scale. I don’t think China will ever block a domestic China media company, its not in the DNA of chinese media to be controversial or provide opposing insight into entertainment media.

  3. lets reflect to Alibaba - it was already a strong domestic company and I used it domestically before it was “found” and then it broke out globally and became even stronger. IQ will probably do the same and start expanding into other asian markets. I don’t think it will have much impact on western markets in near term but definitely I can see them playing in other asian countries in the near future and be a success.

  4. IQ’s member fee is cheaper than buying counterfeit discs of inferior quality, majority of population in almost all income brackets have a mobile phone and data plan and they consume massive amounts of media on it. Think about how many people are using mobile payment in china, people consume more media on their phone and most of that is video and social media content.

this is just the tip of the iceberg for reasons why im bullish. I opened a 2% position on the pullback.

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For some reference, I’m based in HK and have lived here for a very long time.

Like Saul and a few others on this board; in 2010-2011, I was also badly burnt by a few reverse merger Chinese listings in the US (Wonder Auto, Deer Consumer Products, RINO etc.) Back then, I did my due diligence and even spoke to the CFOs of these companies on the phone - they lied through their teeth and I bought into their story; my fault.

Within a space of a few weeks, ALL of these stocks were exposed as scams and to my horror, they fell 30-40% in a single day and never recovered. Unsurprisingly, I swore to NEVER invest in Chinese stocks again.

Over the following years; I analysed what had transpired and realised that I was dumb to get lured by these micro-caps (market caps were in the range of $100-300m) reverse merger listings which had no analyst following or institutional ownership. Despite the fact that these businesses were announcing impressive results; their stocks were not going higher and institutions were not investing - a HUGE red flag; which I ignored because I felt I was too smart.

In 2015, I came to the conclusion that yes, most of the Chinese companies are probably lying about something but then, so are most of the companies in the West (think Volkswagen emissions scandal, Facebook data breaches, Alphabet paying for favourable research on ‘internet regulation’, Wall Street banks etc.). Back then, I also realised that if any large-cap Chinese company is being led by a founding CEO with skin in the game; and it is being followed by analysts and has institutional ownership, then the chances of outright fraud are probably off the table.

This is when I started re-investing in the high-growth large cap Chinese businesses and currently own a handful of such stocks.

In order to control my risk; I limit my investment in any company (whether Chinese or American) to 5% of my portfolio - I’ve been investing for almost 20 years and know that the vast majority of businesses operating today are not entirely honest and do anything they can to boost profits. In such a world, taking small(ish) positions allows me to sleep well at night.

Going forwards; yes, it is possible that one or two of my Chinese stocks could be exposed for cooking their books; but due to my small position size in each; this is a risk I’m willing to take.

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GrowthMonkey,

Sorry to hear that, it seems like a valuable lesson learned. I worked in manufacturing in mainland China for the time I was there and have seen a lot of different ‘business setups’ while I was there. So, yes - we all need to be careful.

Developing countries have different types of risks compared to western countries, rule of law is often not great. Its even common for mainland china companies to outright defraud HK people as they can be easy targets since HK is known for their strong rule of law - a lot of trust and belief is a by product rule of law.

One of the things I do as a gut check for myself is to speak to family relatives living in China to see if they know or use the product/service of the listed company. That is often much better than speaking to anyone that works for the company. Its rare that a company is exclusively/primarily doing business outside of China and getting a sense of how domestic business is going is a good way to gut check. Its easy to cook books in China, many companies do it but its more difficult to cook up a consistent story to explain business practices, success, and interactions. Stories can be crosschecked, the books cannot :slight_smile: . Chinese don’t even trust each other’s numbers when its business to business, people often visit on-sight businesses to gauge the scope of business.

Being burned however, in my opinion shouldn’t be a reason to not invest but be treated as a lesson. Its as if to say: I’m never investing! After being burned in the U.S. 2008 crisis (or any of the other crashes for that matter). I have an older work friend who stopped stock investing after losing much of his retirement savings in 2008 and have not been able to convince him to even try ‘conservative’ stocks.

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Agree with your post; all we can do is live and learn.

Thanks!

GM

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“Being burned however, in my opinion shouldn’t be a reason to not invest but be treated as a lesson. Its as if to say: I’m never investing! After being burned in the U.S. 2008 crisis (or any of the other crashes for that matter). I have an older work friend who stopped stock investing after losing much of his retirement savings in 2008 and have not been able to convince him to even try ‘conservative’ stocks.”

Your friend sold in the crisis?

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This has been a great thread.

Being burned however, in my opinion shouldn’t be a reason to not invest but be treated as a lesson

Just for clarification, I got a different message from both brittlerock and Growth Monkey. Many of us are referring to the China craze a few years ago, which swept through some of the paid services too (CGA, YONG, etc).

The problem with China stocks is the numbers are simply dazzling, and the valuations seemingly unreal for the growth/potential/world dominance that you are purchasing. So they are irresistible to read about. Just the comparison of numbers in this thread would make one want to cast NFLX aside and invest in the cheaper IQ.

The lessons of the reverse mergers aren’t really about getting burned. The culture in China is different. They do NOT run the companies for the shareholders. They view shareholders as a source of capital. There were a great many posts about how business is run to enrich the family. There is a different set of values and a different way to communicate. It is hard to know if you see or read is real or whether it is some sort of game meant to separate investors from their dollars.

I find IQ extremely interesting, but I don’t know how to resolve the basic cultural differences in the motives of how companies work and for what true purpose. It isn’t about getting burned, they just don’t believe the same things! Some of the basic tenets of business culture and the role of investors are different in China, making it difficult to trust the giant numbers that inevitably come with each story.

Many great investments may be missed, but China would never be more than a tiny part of my investment dollars (at least in these times), there are too many good opportunities here already.

Gator

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