Here are some extracts:

ValueCruncher’s models … is highly graphical; and, for $49 a year, community members can build and maintain their own twists on ValueCruncher estimates. It recently released a new graphical way to compare valuations among competitors; and its blog is rich in analysis, short on the usual blather.

Both sites require a bit of a learning curve, but only because of the math-heavy nature of the content. Variants on discounted-cash flows are widely available on the Web. But much of the data needed to plug into these models can be hard to retrieve–at least in time to take action. That’s heavy lifting both sites do for you—at least for covered companies.

At the very least, both Trefis and ValueCruncher provide inexpensive tutorials in a fundamental aspect of any investor’s education—the standard analytical method for valuing stocks.

It is a good summary. We really like what Trefis are doing – and in our view we are the two main players in this pretty nascent part of the on-line financial information/analysis space.

Here is a quick look at some of the new features:

1. We calculate an implied share price based on the weighted average of the selected comparable companies, so you can immediately see if the company is under or overvalued on this basis.
2. We use an EV/EBITDA comparison by default (or EV/Revenue for companies with negative earnings).  Subscribers can choose between these and seven other valuation metrics.
3. We choose a set of comparable companies, based on broad industry codes.  Subscribers can swap any of the companies we select for any of the nearly 9,000 other companies in the Valuecruncher database.
4. We show the weighted average value for the selected valuation metric.  Subscribers can update this value and see how this impacts the implied share price and the buy/sell recommendation.

This new tool is shown by default when you search for a company or click through from the industry or market links.

Register today to unlock Valuecruncher and get unlimited access.

Some examples: IBM & YHOO

Valuecruncher places an implied share price of $143.66 on IBM – this is 10.4% above the current share price.  This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Oracle (ORCL), Hewlett-Packard (HPQ) and Accenture (ACN). The current IBM share price gives an EV/EBITDA multiple of 8.14x – this is in the middle of the comparator set. Some of these businesses have a larger services offering (IBM, HPQ and ACN) – but we see IBM being undervalued.  Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of IBM.

Valuecruncher places an implied share price of $12.02 on Yahoo (YHOO) – this is 22.7% below the current share price. This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Google (GOOG), Time Warner (TWX) and IAC (IACI). Yahoo currently has an EV/EBITDA multiple above that of Google – a dollar of Yahoo EBITDA is being valued by the market more highly than a dollar of Google EBITDA. Yahoo looks overvalued at these levels. Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of Yahoo.

What is EV/EBITDA?

Enterprise Value (EV) is simply the market capitalization plus net debt (borrowings less cash). We use EV to capture the impact of debt and cash on a companies balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

So what is the possible future of Yahoo Finance?

This is our view of the world:

We have developed a range of scenarios for the market based on Free vs Paid and Individual vs Collaborative approaches.

Here we are focusing on the Super Commons vs Walled Garden scenarios. The We Live In Public and Rock Stars are in play (and we are watching them) – but we see the current battle being Free vs Paid.

Where is Yahoo Finance today?

The Yahoo Finance business model is primarily to license financial information then serve that information up for free and sell advertisers the audience. It is pretty simple – but you are hostage to the data providers (see the bottom of this page).

So how much reach and revenue does Yahoo Finance have? A number of analysts have tried to pull some numbers together – here is our take (using those analyst numbers as a guide):

We think that Yahoo Finance does around 17.5 million unique visitors a month in the US and 8.75 million unique visitors a month from the rest of the world (half the US number – guess at our end) – for a total of 26.25 million unique visitors per month. Based on dated statistics of the average of time on the site (just under 30 minutes per unique visitor a month) and page view numbers – we estimate an average of 50 page views per month for each unique visitor. That means a total of 1.3 billion page views per month for Yahoo Finance. We note the $9 effective CPM rate in one piece of analysis ($6 x 1.5 ads per page). However, we think that looks low – we would expect a RPM (revenue per 1,000 impressions) of around $20. That gives monthly revenues for Yahoo Finance of $26.25 million – annual revenues of $315 million. If the RPM number is only $10 that would mean annual revenues of $157.5 million or if it is $30 that means annual revenues of $472.5 million – our guess is between these numbers. That is smaller revenue than I expected – and the data costs will limit the margins.

What about the competition?

The competition are the other free financial information website – AOL Money and Finance, MSN Money and Google Finance. But also the traditional financial information providers such as Thomson Reuters and Bloomberg. Both Reuters and Bloomberg have a range of revenue streams – but their core business is selling sophisticated timely information to financial institutions. The larger opportunity for Yahoo Finance is taking on these traditional financial information providers.

To put our estimates of Yahoo Finance’s revenues in context – Thomson Reuters ($TRI) had revenues of $13.0 billion last year (enterprise value (EV) / revenue multiple of 3.0x) and Bloomberg had reported 2008 revenues of $6.1 billion. Prior to the merger with Thomson – Reuters had 2007 revenues of GBP2.6 billion ($3.85 billion at current exchange rates). Yahoo Finance’s revenues are tiny in comparison to the traditional financial information providers.

Reuters and Bloomberg would state that their services are deeper, richer and more relevant for traders and investment bankers than the free offerings of the on-line financial information sites (such as Yahoo Finance). That view would be correct today – but also potentially dangerous.  We think that these companies recognize the danger posed by the free sites. For example:

• Bloomberg hiring a former Yahoo executive to run Bloomberg.com. Bloomberg are also trialling a new retail investor friendly look for the site. Bloomberg also scooped up traditional business-weekly BusinessWeek. Creating some interesting internal dynamics.
• Reuters launched a new free website – that is, in our opinion, the best “free” offering in the market. Reuters are also launching a video offering – which has been described as a financial YouTube.  The video offering is aimed currently at subscribers – but it could easily become a free ad-supported model.
• Morningstar acquiring financial blog Footnoted.org.

We think these are just a number of examples of the traditional financial information providers preparing for a potential war with the free financial information sites. These moves position the traditional financial information providers brands much more in the retail space.

Should the traditional financial information providers should be scared?

The traditional financial information providers are worried that on-line finance sites could do to them what Craigslist did to newspaper classifieds. Take a multi-billion dollar industry and make it a multi-hundred million dollar industry – with the benefits flowing to consumers of financial information. Financial information market disruption.

What we mean by “disruption” is the Clayton Christensen disruptive innovation framework. This describes the process where a product or service starts as a simple offering at the bottom of a market (but with an advantage – examples: price, size, etc) then improves moving up-market, eventually displacing the traditional incumbents in the industry (based on being “good enough” but retaining the original advantage). Existing examples of disruption in the finance space include: index funds and discount brokers.

Our take on the potential on-line financial information market disruption:

The traditional financial information providers (Reuters, Bloomberg, etc) have an offering that is targeted at traders and corporate finance professionals. The services are subscription based and provide a lot of information – historic financials, forecast numbers, analysis tools, etc. The on-line finance sites have less information – but have quickly (on the basis of being free) attracted a sizable audience. If these free sites can improve their offerings (add sustaining innovations) – they will become attractive to more demanding customers. This means some customers stop purchasing expensive financial information products and move to the free offering. More move as the free offering improves and it meets their requirements.

How could that happen?

First - XBRL. XBRL stands for eXtensible Business Reporting Language. XBRL is an open-source standard for communicating financial information. The Securities and Exchange Commission (SEC) is mandating XBRL for US companies (over a three-year roll-out) – which means it is coming for the rest of the world as well. That means that base financial information – the type traditional financial information providers charge for – will become virtually free. This will allow on-line finance players to break free of the current relationships with traditional financial information providers (and allow more innovation). It won’t take all the traditional players revenues – but it will take away an historic advantage and even the playing field.

Second - innovation from on-line financial sites (especially the major portals like Yahoo Finance). By adding tools and functionality (combined with XBRL data) Yahoo Finance can take market share from the traditional financial information providers. As Yahoo Finance’s functionality improves – current subscribers will migrate to the free service (when the functionality is “good enough”). Yahoo Finance can keep the advertising model – but good ad-targeting can extract more from users of valuation tools than those simply scanning the current Key Statistics page.  This analysis focuses on Yahoo Finance – but it could be for any of the major on-line finance portals. Do any have the ambition to do it?

There is a big opportunity for the on-line financial sites (such as Yahoo Finance) to disrupt the traditional financial information providers. I hope they can – because it would democratize finance. students and retail investors could have the same information and tools as traders and investment bankers at Wall Street firms. That would be a good thing.

Will it happen?

It does appear that the traditional financial information providers are investing more in the threat than the potential disruptors. This means that the traditional players may yet win the market. In Yahoo Finance’s case there may also be issues with management focus (peanut butter) and potentially a dated technology platform. We think there are still some powerful forces in the disruptors favor. We hope Yahoo Finance (or someone) does step up.

Mark Clare, Valuecruncher CEO

Disclosure: No Positions

Full disclosure – we have had a couple of conversations with Yahoo Finance about Valuecruncher. Nothing about big picture strategy – these are our thoughts and estimates alone.

We tend to get some complaints when we write about New Zealand-based issues. This post is one of those New Zealand focused ones. Feel free to skip it if that isn’t what you are interested in.

Dear NZX

We like your work – we really do. The relevance and professionalism of the New Zealand share market has improved by an order of magnitude over the last ten years.

But we also love the quote from Il Gattopardo (The Leopard) – “If we want things to stay as they are, things will have to change”

We know you get that – for New Zealand to remain competitive we need stronger capital markets. The Capital Market Development (CMD) Taskforce has some good thinking – which needs the political support to implement. However, looking at the majority of suggestions – they are 20^th century solutions. Do they need implementing – absolutely. But for a small market like New Zealand we need to be looking at different solutions as well – what works in a big market doesn’t necessarily work here. We need to be looking at more innovative solutions – and again, I do think you get this. Adding Rod Drury to the NZX board is a step in the right direction.

We are in the broad equity research space – and we were disappointed by sections of the CMD Taskforce report. The CMD report (from page 69) outlines a situation where there is limited traditional equity research coverage of smaller listed companies. The CMD report offers solutions including public and private funding of additional equity research (supplied by traditional research providers) – because that is what other markets are doing. There is discussion about a “small levy on trades” (page 70).

Really. That is the best solution we have got. New Zealand is a very small market – quoting the CMD report:

“INFINZ data show that 30 stocks are covered by all six major New Zealand brokerages, and a further 37 stocks are covered by some of those firms. There are 47 (41 percent) NZX companies without any analyst coverage at all, and a further 15 have only one or two analysts covering them. There is generally no coverage of small stocks, and no coverage of the companies on the smaller exchanges, the NZAX or Unlisted.”

“All six major New Zealand brokerages”. Unless the plan is to make a significant investment in research (more than one analyst per company) – and that doesn’t seem possible – why are we bothering? The traditional large market research model doesn’t seem to be relevant here. Never mind that most traditional research reports are virtually impossible for the average retail investor to comprehend – anecdotally the consumption of research reports by retail investors in New Zealand is low. NZX knows where retail investor education is in New Zealand – the large electronic ticker going around the NZX Centre in Wellington uses full company names and the share price not ticker codes and the share price. That is the right thing for NZX to do by the way – but it shows how far we have to go.

Why not start with a plan to provide base financial information and valuation resources for the market? Let’s initially make information and tools available – how people use them is the next step. NZX.com is the logical home for those resources.

There will be traditional coverage where the market deems it worthwhile – the largest companies on the NZX only. For the rest not covered by traditional research (in fact for all of the NZX companies) NZX should be following Jeff Jarvis’ rule from What Would Google Do – “do what you do best and link to the rest”.

Most investors in New Zealand go to the NZX website for information on listed companies. NZX has added news feeds from Fairfax to encourage more engagement – but where is the financial information and analysis? NZX should make base financial information and valuation resources available. NZX.com is in a position to be the default portal for listed company information in New Zealand. There are options available to NZX where other parties are providing free access to information and tools to fill the current gaps on NZX.com.

Example 1 – Reuters

It isn’t well known – but the free Reuters website has good coverage of NZX listed companies. We can use New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ) as an example.

For New Zealand companies all you need to add is a “.nz” suffix to the ticker code and there is a quantity of quality free information. The information is comprehensive – and in a single location. Using $TEL.NZ as an example – consensus analyst estimates, historical financial statements, charts and even paid research options. It isn’t only the large NZX companies – for example Xero ($XRO.NZ) even though they have no analyst coverage.

Example 2 – Valuecruncher

At Valuecruncher we provide interactive valuation tools for listed companies. This already includes 156 companies on the NZX. These are comparator based tools. Using $TEL.NZ as the example again.

Valuecruncher Interactive Analyst Report For Telecom New Zealand ($TEL.NZ)

Our algorithms choose the peer group from an international selection. But you can change the peers to a New Zealand focused group. The tools are interactive.

Disclosure: Yes – one of the solutions is Valuecruncher. In case there is any doubt – that is the company associated with this blog.

NZX – do what you do best and link to the rest. What would Google do? Google Finance uses links to Reuters for deeper data.  NZX.com can be the default financial information and valuation resources location for New Zealand as a first step to a potentially bigger future. It is time to look for specific solutions for this market – not simply copying the actions of larger markets.

Regards,

Mark Clare

Valuecruncher CEO

Tracked, ValueCruncher, StockTwits, and many more are the leading edge of a revolution — a revolution in what finance has been for the last several centuries, and what it must become in the 21st.

That is really cool.

One of the scenarios being Rock Stars.  We described the Rock Star scenario as:

Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing.

Last week Dan Carroll and the team at KaChing announced their new offering – and started to show how this scenario may play out. There was a feature in the NY Times which described the business model.

Customers will be able to open a brokerage account with Interactive Brokers and link their account with their choice of investors on KaChing. KaChing charges customers a single management fee of 0.25 percent to 3 percent, set by each investor. KaChing keeps a quarter of the fee, and the investors get the rest.

Each time the investors make a trade, KaChing will automatically make the same trades for the customer. Customers can log on whenever they want to check their portfolio’s performance. They can send the investor private messages and receive alerts if the investor does something unusual. With the click of a mouse, customers can stop mirroring an investor.

KaChing has an A-list team of investors behind them. The on-line finance space has a lot of interesting experiments going on – but we think this is a particularly interesting one. A lot of us will be watching closely how KaChing goes.

Disclosure: I met Dan and Jonathan from KaChing at the FinovateStartup09 event in San Francisco in April 2009. We had the stand next door. Good guys, smart guys – doing interesting things.

Mark will be at the Finovate conference in New York on the 29 September and also attending the StockTwits StockCamp event at NASDAQ on the 2 October.

You can follow Mark on Twitter – @Valuecruncher.

Where We Are Today

We view the on-line finance space in three broad areas: Information, Analysis and Execution.

Pre-1995 this whole area was dominated by brokerage firms with full-service offerings. They had the information, did the analysis and the executed the trades. Since 1995 that has changed pretty significantly.

Information – background operational and financial information. The main players in this space are now the large finance portals (Yahoo, AOL, MSN, Google, etc). They built and extended these offerings in the Web 1.0 and 2.0 days. The business model is primarily advertising – free to consumers. It should also be noted that there is still a paid market for detailed and timely financial information (Reuters, Bloomberg, Capital IQ, etc).

Analysis – what does the information mean? Should I buy a particular stock? What is this stock worth? Full-service brokers still compile research notes and reports for clients – but this space has begun to be disrupted. This disruption is coming from a number of areas:

Qualitative – primarily finance blogs. These take two main forms: user-generated content aggregators (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Community Sites – where retail investors look to communities of investors for advice on where to invest. Examples: The Motley Fool, Wikinvest, Covestor, KaChing, etc.

Niche Tool Providers – primarily quantitative-based tools. For example Valuecruncher.

Execution – the actual buying and selling of stocks. The discount brokers have come to dominate this space (i.e. Charles Schwab, ETrade, etc). They disrupted full-service brokers with simple flat-rate commission structures starting in the Web 1.0 days.

That is a high-level view of where we are today. What might happen next?

We completed a scenario planning exercise based on the frameworks developed by people like Peter Schwartz.

We started with an analysis of trends and uncertainties. A trend is something that we feel certain is occurring. An uncertainty is something that could still go either way.

Trends

1. Execution becomes a commodity – executing trades will continue as a low-cost business. There will be some geographic-based regulatory moats – but no ability to generate abnormal returns. Other parties could enter this market (i.e. portals).
2. Death of traditional equity research – the current model is too expensive and producing research reports that are complex and hard for retail investors to consume. Traditional equity research will head the way of newspapers. Equity research is important but the delivery methods must change. There will be a space at the top-end for high-quality  research (that clients will pay for) but only a niche.
3. Investor knowledge continues to improve – the level of general investor knowledge continues to improve but there still remains a significant gap between the average retail investor and the corporate finance professional.
4. Financial blogs continue to be influential – high-quality analysis continues from blogs. There are two broad models – aggregating content (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Uncertainties

1. Individual VS Collaborative – how will retail investors choose to research investment decisions? Individual analysis – retail investors (with improving education) complete their own analysis on where to invest – both qualitative and quantitative. Collaborative – retail investors look to communities of investors for advice on where to invest – track record is vital.
2. Free VS Paid – financial information has proven to be an isolated area on-line where paid models have worked (i.e. WSJ). Moving forward – will retail investors be prepared to pay for financial information or will free win out?

We then construct a basic scenario matrix. These scenarios are not meant to reflect concrete versions of possible future states but rather to illustrate the potential impact of the identified trends and uncertainties. There will be components of all of the scenarios in the future – this analysis is intended to emphasize trends and uncertainties. We look at the winners in each scenario and where the portals come out.

Scenarios

1. We Live In Public – Retail investors seek advice from communities of other investors. Track record is vital – this is open to abuse. Retail investors won’t pay for this advice. Community owners seek models to monetize the audience not the content – none is initially obvious beyond advertising. Winners – The Motley Fool, StockTwits. Portals – business as usual providing (mostly) raw data.
2. Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing. Portals – business as usual providing (mostly) raw data.
3. Super Commons – Retail investors value analysis and tools but are not willing to directly pay. There is a move from traditional on-line financial information providers (i.e. Capital IQ) to low-cost/no-cost providers (i.e. financial portals). Retail investors and corporate finance professionals use the same tools. New tools are added (i.e. Google Domestic Trends). Pay-walls come down – financial blogs are at their most influential. Winners – Portals and financial blogs
4. Walled Garden – Retail investors value analysis and tools. The financial blogs continue to exert influence. However the pay-wall remains at the WSJ and on-line information providers (Reuters, Capital IQ) have a valuable and growing business. Winners – Reuters, Bloomberg, Capital IQ. Portals – Opportunity to launch a low-cost disruption strategy aimed at on-line information providers (a good enough offering to tempt [for example] Capital IQ’s clients).
   

Implications

• Discount Brokers – Challenged across all scenarios. Must follow a low-cost strategy and only add services if that will increase trades (and commissions).
• Financial Blogs – Winners across all scenarios (a role to play in all scenarios). Two distinct approaches – aggregating content VS traditional journalism on the web. We would expect one to come to the forefront (our bet would be on aggregating content – but it is too early to say).
• Community Sites – Winners in the “We Live In Public” and “Rock Stars” scenarios. Significant opportunity if community is the way that people choose to make investment decisions. A business model has proven to be a challenge to date for players like the Motley Fool (“We Live In Public” scenario). It is more obvious if investors will pay to be part of the community (“Rock Stars” scenario) – this is currently unproven however.
• Paid Finance Services – Business as usual in the “Walled Garden” scenario and challenged across all other scenarios. Even in the “Walled Garden” scenario there is the potential for the paid financial services to be disrupted (low-cost disruption) by the portals offering extended services (i.e. Google Domestic Trends). Currently users of paid services also use the free portal services (Yahoo Finance and Google Finance). There are limited options to defend this. Paid services do provide the data used by the finance portals. Reuters are also moving into the free space.
• On-Line Finance Portals – Winners across all other scenarios. In the “We Live In Public” and “Rock Stars” scenarios – it is closest to business as usual. These players are the ones with the ability to acquire or build community sites. Investors that are part of communities still require basic financial information and tools. In the “Super Commons” and “Walled Garden” scenarios there are big opportunities. Both require adding analysis tools. Partnering with financial blogs is key. Adding analysis tools is an arms race between the different finance portals.

This is one view of the potential future. Tell us what you think.

Valuecruncher Future Of On-Line Finance Summary (Four-page PDF summary).

From page 14 of the interim report:

“Work commissioned for the taskforce has found that there is no analyst research is available on 42% of the companies listed on the NZX, and a further 13% of companies have only one or two analysts covering them.”

We would disagree with that assessment. Here at Valuecruncher we cover 156 companies listed on the NZX. This is more than 42% of the companies on the NZSX. We have valuation tools available for companies from Telecom New Zealand ($TEL.NZ) to Xero ($XRO.NZ).

Telecom New Zealand ($TEL.NZ) – Valuecruncher Interactive Analyst Report

Xero ($XRO.NZ) – Valuecruncher Interactive Analyst Report

Now our reports are not the “typical” analyst reports. But we would argue that the current analyst model looks broken – the current model is too expensive and produces research reports that are complex and hard for retail investors to consume. Those are some of the reasons that there is a lack of traditional analyst coverage in markets like New Zealand.

We believe that equity research will change moving forward and while we may not yet know what the final solution looks like – it will be different to what has gone previously. Parties like the The Capital Markets Development Taskforce should be looking at different more innovative solutions and how those can be encouraged.

Clay Shirky – “That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread.”

Financial markets need experiments. For small markets like New Zealand – these are vital.

The first thing you will notice is that we have added a lot more companies to our dataset.  We now have 8,000+ companies on the site.

The second thing you will notice is that we have added an interactive comparator (or multiple) based valuation tool to the site.  This new interactive comparator tool allows you to complete valuation analysis of a company against a peer group across a range of changeable metrics.

As an example here is the Interactive Comparator Valuation Tool for Google ($GOOG).

We have previously written about using comparator company valuations – also called comparable company valuations. We will complete a step-by-step guide to using the tools shortly – but the Valuecruncher newsletter noted above gives a good overview to the broad concepts.

We will soon be adding the capability to change the peer group of companies. Currently the peer group is set by an algorithm and can not be changed.

Discounted cash flow (DCF) valuations are not available for all the companies in the dataset. This is because of data limitations and the relevance of the three-year DCF format for certain industries. Where they are available they are on a tab on the company page.

We are excited to bring you this new interactive comparator valuation tool.  We are still working through the kinks – so there are still some rough edges. We are working through those.  But we hope this tool makes more valuation analysis accessible to a wider group of people.