Apple Inc, is involved in lawsuits relating to the use of its operating system software on computers with PC hardware. According to this article "German Mac clone maker claims immunity from Apple" is selling Intel loaded computers with Mac OS X operating system software pre-installed. An entry-level computer sells for about $643, relative to the entry-level iMac selling at $1199. The issue is that the end user license agreement (EULA) for the operating system 'forbids' the user from installing the software on non-Mac hardware.
But for Apple's valuation, we have a bigger issue in play, what happens if the anti-trust lawsuits prevent Apple from 'forbidding' the installation of their software on non-Mac hardware? Is the EULA an effective barrier to entry?
Clearly, Apple's strategy is likely to remain the same - product differentiation - rather than them trying to compete in low cost alternatives. Does this news, however, change your expectations of future ROE for Apple? How would you expect the profit margin and asset turnover ratios to change in the next few years? How would this affect your forecasts?
Wednesday, February 11, 2009
Some more banckruptcy predictions
In this article in Seeking Alpha, Rick Newman highlights 15 companies that he thinks will not survive 2009. Given how much we have analyzed Blockbuster, are we surprised that it makes the list?
In our financial ratio analysis of Blockbuster it may be well worth our time to estimate some of the default probabilities. Perhaps this would be a good time to try out your eVal software and take a closer look at BBI's numbers?
In our financial ratio analysis of Blockbuster it may be well worth our time to estimate some of the default probabilities. Perhaps this would be a good time to try out your eVal software and take a closer look at BBI's numbers?
Overstock's overstuffed profits...
I hadn't looked at Overstocked for a while, but I came across this article recently "Overstock.com and CEO Patrick Byrne Violate Accounting Rules in Q4 2008 Financial Report" interestingly enough it appears that there is no interest by the company to correct, or in accounting terminology, to restate, their financial reports (see here).
What do you think the market response to firms that restate their earnings to be on average? In a paper published in the Journal of Accounting & Economics, Palmrose, Richardson and Scholz find that over a two day window, these firms experience a negative 9% drop in their share price, with the most negative declines being when the restatement is enforced by the SEC.
My guess is that Overstock is headed for a rough time... what kind of change would this make in our valuation world? Obviously the current period earnings are affected, but does this change our opinions of growth too? How important is it for a firm to 'return to GAAP profitability'?
What do you think the market response to firms that restate their earnings to be on average? In a paper published in the Journal of Accounting & Economics, Palmrose, Richardson and Scholz find that over a two day window, these firms experience a negative 9% drop in their share price, with the most negative declines being when the restatement is enforced by the SEC.
My guess is that Overstock is headed for a rough time... what kind of change would this make in our valuation world? Obviously the current period earnings are affected, but does this change our opinions of growth too? How important is it for a firm to 'return to GAAP profitability'?
Monday, February 9, 2009
Valuing Netflix earnings and growth
At the time of this post, the market was valuing Netflix at $37 per share, one year ago the share price was $26.89. The raw return for the stock over the past year was( ($37-26.89)/26.89) = 37.6%
One question to ask was how did Netflix beat the expectations set at the end of last year...?
One interesting article that discusses some of these expectations (at the time) is the article "Netflix looks like a bargain again" written about a year ago, along with expectations about 2008 written in the companion piece "Netflix 2008 Outlook" where the author discusses expected growth rates in subscriptions.
What do you believe the Outlook for 2009 will look like?
One question to ask was how did Netflix beat the expectations set at the end of last year...?
One interesting article that discusses some of these expectations (at the time) is the article "Netflix looks like a bargain again" written about a year ago, along with expectations about 2008 written in the companion piece "Netflix 2008 Outlook" where the author discusses expected growth rates in subscriptions.
What do you believe the Outlook for 2009 will look like?
Tuesday, February 3, 2009
The value of 'free'
A recent promotion by the Denny's restaurant chain - the giving away of breakfast for free, raises some interesting valuation questions: what is the expected future value of a promotions that involve free 'gifts' and how do firms successfully sustain repeat business? Read the article here.
Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?
Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.
Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?
Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?
Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.
Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?
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