The very smart Zack Miller asked that question on his blog. I could not help but respond – what is a 500+ word comment amongst friends. Here is that comment – with a few added links.

Why hasn’t Yahoo Finance changed in 10 years?

Yahoo Finance is a really interesting case. A key disruptor in Web1.0 then nothing.

You have seen my post.

Here is my quick take:

1. It isn’t that big a business for Yahoo (I think Yahoo Finance is $315 million a year in revenues – see above post for assumptions). That is approximately 5% of Yahoo’s (YHOO) total revenues of $6.46 billion LFY. Yahoo Finance is a big player in the free on-line finance space – but finance isn’t that big a part of Yahoo. Thomson Reuters had $13 billion in revenues LFY and Bloomberg had $6.1 billion in revenues in 2008. We over-estimate Yahoo Finance’s place in the financial data universe – guilty myself.

2. Business model – advertising based (primarily brokers and financial products). If Yahoo Finance innovates – they are likely going after the people that are generating their current revenues. Should they / could they disrupt the market further – probably. But I bet that there is concern about harming the current Yahoo Finance revenue base. Yahoo Finance is a solid earner as it is – why change things (possibly an internal view).

3. The platform is dated – Yahoo Finance is several base-platform generations older than Google Finance (for example) or Reuters free site. That makes keeping the platform stable probably a bigger job than we appreciate. Stability (and extending what they have) vs Innovation – stability appears the winner.

What might change the dynamic?

1. XBRL may be a game-changer. Uncoupling financial information from the existing raw data providers may generate a wave of innovation. New players (without the legacy issues) create base information platforms (not as good as Yahoo Finance initially) and quickly iterate with additional services (i.e. valuation) and disrupt the current on-line players (Yahoo Finance) and wider financial data players (Reuters, Bloomberg, etc). I believe Yahoo Finance keeps Reuters and Bloomberg awake at night today – that scenario may be even scarier for those players.

2. Thomson Reuters, Bloomberg, Morningstar and the other traditional financial data providers (very worried someone will make their multi-billion dollar industry a multi-hundred million industry) are playing really smart. The free Reuters site is amazing. From the outside it looks like these guys see the threat and are positioning to compete with free offerings. The traditional players may yet win the day – but I believe there will be, at a minimum, a value transfer from these players to the consumer.

Yahoo Finance – I think they may be the big loser caught in this cross-fire. Google Finance could be a player – but Google Finance is less of a contributor to Google than Yahoo Finance is to Yahoo. Umair Haque pushed for Google to do the job but Google has enough on their plate addressing the threat Facebook poses to their core business to worry about finance. I do really like Google Domestic Trends – it shows what could be done.

We want to see innovation in this space – and there has not been as much as some of us want. There maybe a step change coming – and that would be very cool.

Zack Miller has a new book out soon – Tradestream. It is on my must-read list.

To those of us with an interest in on-line financial information – Yahoo Finance has a pretty special place in our affections. While early on-line services (like Prodigy) provided some financial information – Yahoo Finance was the first service that provided useful “good enough” financial information for free. Good enough that traders and investment bankers use the service along-side paid offerings like Reuters and Bloomberg (I know because I was one of these guys). Why? Because it is available on a work/home PC for free (and not hidden on a paid Reuters or Bloomberg terminal) and the base information needed to feed into models and analysis is accurate.

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.

Apple ($AAPL) announced quarter one results today.  With the $AAPL share price over US$200 – 52-week range US$82.33-215.59 – we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) – Interactive Analyst Report For $RIM
2. Palm ($PALM) – Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) – Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$189.23 for $AAPL – 6.7% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $QCOM and $GOOG.  I am going to look at only one of the metrics we use at Valuecruncher – EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $AAPLT is trading at 18.6x ($AAPL is being valued at 18.6x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more a dollar of $IBM (more than double), $RIM, $QCOM or $GOOG EBITDA. This is despite $AAPL making less margin at the EBITDA line than any of these comparators ($AAPL made a 22.8% EBITDA margin last year comparded with 23.0% at $IBM and 41.6% at $GOOG). There are still some steep expectations being priced into the current share price.

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of US$187.57 – 7.5% below the current share price. This valuation is in line with our DCF analysis.

Summary

Based on our DCF valuation – $AAPL looks overvalued. Looking at some comparators – the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price – you are paying a full price and there are cheaper options available. We know that we will hear about that from the $AAPL fans out there however.

Disclosure: no positions.

On-line retailer Amazon.com ($AMZN) closed yesterday at an all time high of US$135.91. $AMZN is up 218% in the last 12 months – better than Apple ($AAPL) at 122%, Google ($GOOG) at 88% or the broad NASDAQ at 41% [visual]. Time to have a look at a superstar performance.

Valuecruncher Interactive Analysts Report For Amazon ($AMZN)

We have the comparator group set as Wal-Mart ($WMT), Google ($GOOG), eBay ($EBAY) and Yahoo ($YHOO). You can change these peer companies on the site. For example you could add:

1. Overstocked.com ($OSTK) – Interactive Analyst Report For $OSTK
2. Barnes & Noble ($BKS) – Interactive Analyst Report For $BKS
3. Netflix ($NFLX) – Interactive Analyst Report For $NFLX

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$99.04 for $AMZN – 27.1% below the current share price. Using a DCF calculation we see $AMZN overvalued. But how about $AMZN compared to a peer group?

Comparison Analysis

I kept the first three peer group companies as $WMT, $GOOG, $EBAY and changed $YHOO to $BKS.  I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AMZN is trading at 2.8x ($AMZN is being valued at 2.8x last year’s revenues). This compares to $WMT at 0.6x, $GOOG at 7.8x, $EBAY at 3.4x and $BKS at 0.2x. $AMZN’s profit margins (at the EBITDA line) were 6.2% of revenues last year.  A dollar of $AMZN revenues is being valued more than 4.5 times a dollar of $WMT revenues – despite that dollar of revenues producing less profit (on an EBITDA basis) than the $WMT revenues.  A dollar of $AMZN revenues is being valued just less (15%) than a dollar of $EBAY revenues – but $EBAY produces over five times the profit (on an EBITDA basis) on each dollar of revenues as $AMZN does ($AMZN EBITDA margin 6.2% vs 33.3% for $EBAY).  Wow – based on previous performance $AMZN is trading a a massive premium.

Now $AMZN does have a range of additional services like their AWS offering that big future growth are expected from. But that is some significant future growth that is being valued in.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AMZN is trading at 47.0x ($AMZN is being valued at47.0x last year’s profit at the EBITDA line). A dollar of $AMZN EBITDA is worth more than double a dollar of $GOOG EBITDA ($GOOG has EBITDA margins of 37.3% vs $AMZN’s 6.2%).  $GOOG makes over 6 times the profit on each dollar of revenue that $AMZN does – but each dollar $AMZN’s profits are worth over double the comparable $GOOG profits.

This appears crazy.

Summary

Based on our DCF valuation – $AMZN looks significantly overvalued. Looking at some comparators – the market is valuing $AMZN very highly compared to some peers. We believe if you are investing in $AMZN at the current price – you are paying a full price which includes significant future growth.  We like $AMZN as a company – but not at these valuation levels.

Disclosure: no positions.

It has been a crazy 15 months for the Apple ($AAPL) share price. On the 22 August 2008 $AAPL was trading at $176.79. By 16 January 2009 $AAPL had dropped to $82.33 – down over half (53% down) in under five months. Today $AAPL closed at $190.01 – up over 130% in under nine months. The graph below shows the closing prices over the period. So what do we think about $AAPL?

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) – Interactive Analyst Report For $RIM
2. Palm ($PALM) – Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) – Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$176.16 for $AAPL – 7.3% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $PALM and $QCOM.  I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 4.5x ($AAPL is being valued at 4.5x last year’s revenues). This compares to $IBM at 1.7x, $RIM at 3.5x, $PALM at 3.4x and $QCOM at 5.8x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.  A dollar of $AAPL revenues is being valued more than a dollar of $RIM revenues – despite that dollar of revenues producing less profit (on an EBITDA basis) than the $RIM revenues.  A dollar of $AAPL revenues is being valued less than a dollar of $QCOM revenues – but $QCOM produces nearly twice the profit (on an EBITDA basis) as $AAPL.  We would expect the difference between the multiples for $QCOM and $AAPL to be larger – in $QCOM’s favour. There are some big growth expectations for $AAPL – on an EV/Revenue basis there appears to be a premium being paid for $AAPL against the peer group.

If we lower the $AAPL EV/Revenue multiple to 3.75x (a slight premium to $RIM) then this gives a share price of $163.30 – 14% below the current share price.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 21.51x ($AAPL is being valued at 21.5x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more than double a dollar of $IBM, $RIM or $QCOM EBITDA ($PALM is losing money at the EBITDA line).

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of $160.06 – 16% below the current share price.

Summary

Based on our DCF valuation – $AAPL looks overvalued. Looking at some comparators – the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price – you are paying a full price and there are cheaper options available. We do recognize that there are a lot of $AAPL fans out there however.

Disclosure: no positions.

We have been participants and observers of the on-line finance  space for a period of time now. As part of that we regularly examine our view of the competitive landscape. We have decided to share some of our views on where the very broad industry may be headed. This isn’t company specific – very much the high-level perspective.

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).

If you have not seen it, we recommend going and having a look at a new feature on Google Finance called Google Domestic Trends.

Google Domestic Trends track Google search traffic across specific sectors of the economy. From advertising and marketing to unemployment to air travel.

Google is taking very basic search patterns (at this stage) and showing trends over time. This is an early first draft – but shows the huge potential of Google leveraging the massive information assets they possess. The value starts to come when you layer additional information over the top of this base data. For example – looking at search traffic for air travel then layering the share price movements of two airlines (Southwest [$LUV] and Delta [$DAL]) over the top. Search traffic for air travel is down – but the two share prices examined have taken much bigger hits. Is this an example of an over-reaction?

This type of data will get more sophisticated over time. It is also but another data point for analysis. However, I think that this release from Google Finance is a fascinating step in the on-line finance space. There are elements of the failed Monitor110 business with this. But there is also a reason that people were excited about what Monitor110 could have been. Google Domestic Trends isn’t yet perfect – but it could be a game-changer.

TechCrunch has a good review – and also nails the Gordon Gekko Wall Street quote.

“The most valuable commodity I know of is information.”

Today is five years since Google ($GOOG) had their initial public offering (IPO). That seems amazing to those of us that follow the markets.  In some ways the $GOOG IPO process feels like another time, long ago.  In other ways five years is but a heartbeat. The New York Times has a great piece looking back at the IPO and the skepticism around it. As I said – somehow it feels a long time ago.

After the IPO $GOOG was had a market capitalization of US$27 billion and five years later that has risen to US$140 billion – it has been higher.  Over five years $GOOG’s market capitalization has grown at a compound annual growth rate of just under 39%. That is pretty impressive. The graph below shows the closing prices for $GOOG over the last five years.

At Valuecruncher we have an interactive analyst report for $GOOG. Based on our discounted cash flow analysis – we believe $GOOG is currently fairly valued.

Disclosure: no position

After our recent post on Microsoft ($MSFT) – people asked for a quick take on Apple ($AAPL). Here it is.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) – Interactive Analyst Report For $RIM
2. Palm ($PALM) – Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) – Interactive Analyst Report For $QCOM

$AAPL’s share price is currently trading at US$160.00. This is well up from the 52-week low of US$78.20. The graph below shows the last 12 months of closing prices.

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$161.63 for $AAPL – 1.0% above the current share price. We see $AAPL correctly valued at the moment. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 3.66x ($AAPL is being valued at 3.66x last year’s revenues). This compares to $MSFT at 3.08x, $IBM at 1.70x, $GOOG at 5.73x and $HPQ at 0.91x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.  A dollar of $AAPL revenues is being valued more than a dollar of $MSFT revenues – despite that dollar of revenues producing just more than half the profit of the $MSFT revenues.  A dollar of $AAPL revenues is being valued twice as much as a dollar of $IBM revenues – despite that dollar of revenues producing a similar level of profit as the $AAPL revenues.  As we have previously noted – that is some big growth expectations for $AAPL.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 17.51x ($AAPL is being valued at 17.51x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more than double a dollar of $MSFT, $IBM or $HPQ EBITDA. And more than a dollar of $GOOG EBITDA as well. $AAPL is trading at a higher EV/EBITDA multiple than $RIM and $QCOM as well – but it is in the same general ballpark. $RIM is trading at 15.08x and $QCOM at 16.93x.

Summary

Based on our DCF valuation – $AAPL looks correctly valued. Looking at some comparators – the market is valuing $AAPL pretty highly compared to some peers. On an EV/Revenue basis – a dollar of $AAPL revenues is worth more than a dollar of $MSFT revenues even when the dollar of $MSFT revenues produces nearly twice the profits of the $AAPL revenues. We believe if you are investing in $AAPL at the current price – you are paying a full price and there are cheaper options available.

Disclosure: no positions.

One of the things that we frequently observe in discussions about stocks is a focus on the qualitative story – “I like my iPhone, buy Apple  ($AAPL)”.

Now the story behind a stock is important. That Apple (or any other company) makes great products that people want to buy is very relevant to the value of the company.

BUT - to make good investment decisions you need to understand how the financial markets value this story. Markets can have an overly optimistic or pessimistic view of a company. To understand value – you need to look at the numbers.

Let’s look at an example – Microsoft ($MSFT)

We have previously looked at $MSFT and the comments on those posts have reflected the challenges that $MSFT faces as a company moving forward. These comments have mostly reflected the story of these challenges – the view that $MSFT will not be as successful in the future as it has been in the past. Because of these challenges – $MSFT must be a bad investment.

Let’s have a look at that assumption – from a valuation perspective.

Remember – the market should value companies on future expected prospects (measured in future expected cash flows). Where opportunities exist, either buying or selling, is where companies expected future cash flows are viewed either excessively optimistically or pessimistically. Over the long-run it should correct.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” — Benjamin Graham, The Intelligent Investor

Now looking at $MSFT.  It has been an amazing business – it has the second largest market capitalization in the world after Exxon Mobil ($XOM) [$XOM US$336.41 Bn, $MSFT US$218.31 Bn, PetroChina US$208.37 Bn]. Since 2005 (to 2008) the company has grown revenues at a compound annual growth rate (CAGR) of 15% with EBITDA margins of 40%.

Now $MSFT has a raft of potential challenges to their business – only one recent example: Google Chrome OS.

But how is the $MSFT story being valued? We will look at this from two angles – $MSFT vs a set of peer companies and $MSFT as a standalone entity using a discounted cash flow valuation model.

Comparator Analysis

At Valuecruncher we provide a range of different valuation metrics for each company and a starting set of peer companies (that can be changed).  Here is the $MSFT comparator tool – and some explanation on how to use the tools. Our tools are interactive – you can adjust the valuation outputs to see the impact on the share price.

I am going to look at two of the metrics – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

For $MSFT we will look at four comparators – IBM ($IBM), Apple ($AAPL), Google ($GOOG) and Hewlett-Packard ($HPQ).

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $MSFT is trading at 3.2x. This compares to $IBM at 1.7x, $AAPL at 3.5x, $GOOG at 5.5x and $HPQ at 0.9x. $MSFT’s profit margins (at the EBITDA line) are 43.3% of revenues compared to 20.6% and 12.0% for $IBM and $HPQ respectively – so those feel right.  $GOOG has similar margins to $MSFT and significant growth options – but a dollar of $GOOG revenues being worth 70% more than a dollar of $MSFT revenues feels rich. But the standout – to us – is that $AAPL with profit margins half that of $MSFT is valued similarly on an EV/Revenue basis. A dollar of $AAPL revenues is being valued slightly more than a dollar of $MSFT revenues – despite that dollar of revenues producing less than half the profit of the $MSFT revenues.  That is some big growth expectations for $AAPL.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $MSFT is trading at 7.4x. This compares to $IBM at 8.2x, $AAPL at 16.5x, $GOOG at 14.8x and $HPQ at 7.4x. Talk about no respect – a dollar of $MSFT EBITDA is worth only slightly more than a dollar of $HPQ EBITDA and less than the other comparators.

Discounted Cash Flow (DCF) Analysis

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$29.43 for $MSFT – 18.5% above the current share price. A key input to that calculation is an estimate of long-term growth of 4.0% – which we don’t feel is too aggressive. Remember revenues have grown at a CAGR of 15% since 2005. The US economy grew at a 3.6% CAGR between 2003 and 2007.

Summary

Our DCF analysis produces a valuation of US$29.43 for $MSFT – 18.5% above the current share price. This equates to an EV/EBITDA multiple of 9.1x. This appears reasonable in comparison to the peer group of companies that we have examined.

Based on our analysis it appears that $MSFT is undervalued. There are certainly challenges facing the business – but the market currently has an overly pessimistic view on the company. $MSFT currently represents a good buy. All our tools are interactive – you can complete your own analysis.

Disclosure: No Positions.