A Few Thoughts On the Etsy IPO

A few tidbits from our analysis of the Etsy IPO

Etsy is going public very soon.  There are some interesting things about the company.  Such as:

-Who knew selling arts and crafts could generate $122 million in a year?  Those local art fairs are deceiving.

-It costs a lot of money to sell that stuff.  Etsy lost over $15 million doing it last year.

-Etsy considers active sellers as a member who has created an account and has listed an item in its marketplace, which seems to be a low standard for “active.”

-Etsy considers active buyers as someone who has made a purchase in the last 12 months, which makes more sense.

-Lots of people use Etsy: 1.4 million active sellers and (more importantly) almost 20 million active buyers.

-Mobile makes up over half of its visits.

Etsy Logo

Etsy to IPO soon. IPO is now a verb, I guess.

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Etsy IPO Puts Some Shares Aside For The Little Guy

Homey spin on IPO directed share program for Etsy.

Usually, you need to be a big institutional investor or an individual with some clout to get your hands on some IPO shares. Or, you could get lucky in an E*Trade allocation.
For friends and family of the IPO company, you may get your hands on some shares through a “directed share program.”

For Etsy, it has reserved up to 5% of the shares in its IPO for smaller investors and folks in the U.S. Etsy community. Morgan Stanley will run it even though they usually don’t like small time investors, from what we hear.

Etsy Logo

Etsy sets some aside for the little guy.

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Zynga Falls, King Digital Rises, Investors Hardest Hit

 Zynga and King Digital, the two most prominent casual game companies make big stock moves in opposing direction last Friday, but both show the investment risk in this space.

We have previously discussed the woes of Zynga. Among these posts was the discussion of the hiring of Don Mattrick to replace Mark Pincus as CEO in July 2013. At the time, ZNGA was trading for $3.30/share. It is now sitting at $2.24/share. ZNGA fell as an analyst slammed Mattrick for not following through on his plan to revitalize the company and for making the same mistakes Pincus made.

Relatedly, there is much frothy discussion about a 13% increase in the stock price of King Digital on Friday. However, the current $16.70/share stock price is still substantially below its March 2014 IPO price of $22.50/share.

It is hard to believe the amount of revenue that can be generated from small, social games. However, investors must remember that generating the immense popularity for a game is like Mr. Miyagi catching a fly with chopsticks. Building on that success is even more difficult. As much as many of us are rooting for these Zynga, King and others, it would be prudent to remember that long-term success in this area has the odds of beating the house at Zynga poker (you know what we mean).

Note:  This was written prior to the opening of trading today.

Mr. Miyagi rebalances his stock portfolio.

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Amazon Cloud Service Growing


Amazon to report AWS cloud segment separately in upcoming SEC filings.

Amazon’s cloud offering, known as Amazon Web Services, or AWS, is growing.  This is not just is absolute terms but in relation to the rest of Amazon’s business as well.  Amazon describes its AWS business as:

“a broad set of global compute, storage, database, analytics, applications, and deployment services that enable virtually any type of business.”

Currently, Amazon reports two segments, and they are by geography:  North America and everything else, or “International.”

In its latest annual report on Form 10-K, Amazon noted that it would soon be reporting AWS as a separate segment.

 ”We expect to change our reportable segments to report North America, International, and AWS, beginning with the first quarter of 2015.”

Amazon did not say that it would necessarily be required to report in this manner, which it may be required to do if it meets various 10% thresholds of revenue, profit/loss or combined assets.  It is also a distinct business unit with an SVP-level person.  In addition, it is directed to businesses, rather than consumers, like their other products.

Like many people, we will be watching closely to see how this business has grown and is growing.


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Shake Shack Shimmies Up The Charts – Big IPO Debut

We previously mentioned Shake Shack’s IPO filing here.

SHAK increased its offering range from $14-16 to $17-19 and ultimately priced at $21, raising $105 million (before expenses and underwriting discounts).  Demand was obviously high for these burger purveyors.  At this writing, the stock price is $45.90 and the market cap is about $1.6 billion.  It has 63 restaurants and net income for 2013 of $5.4 million (before adjustments for certain transactions).

By way of comparison:

Buffalo Wild Wings owned 434 locations and franchised an additional 558 locations, had net earnings for 2013 of $71.6 million and has a market cap of about $3.4 billion.

Bloomin’ Brands owned and operated 1,344 and franchised 164 restaurants under the Outback, Carrabba’s, Bonefish, Fleming’s and Roy’s brands, had net income for 2013 of $214.6 million and has a market cap of about $3.2 billion.

Or El Pollo Loco:  2013 loss of $16.9 million but net income of $38 million through three quarters of 2014 – $984.3 million market cap.

Do you think that huge future location growth is built in to this price.  Do you think we think so?  There is some serious brand building going on among burger eaters and investors.

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Shire Rings In The New Year With Deal To Buy NPS Pharmaceuticals For $5 Billion

Shire Brushes Its Shoulder Off and cuts deal for NPS.

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In October, Shire’s (Nasdaq – SHPG) ill-fated $52 billion deal with AbbVie died due to hysteria over tax inversions.

“The deal is the largest casualty yet of rules announced last month by the U.S. Treasury Department to make tax inversion deals more difficult. The new rules “reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions,” AbbVie said late yesterday in a statement.”

Shire is bouncing back, at 1/10th the size, announcing that it has entered into an agreement to acquire NPS Pharmaceuticals (Nasdaq: NPSP), a biopharmaceutical company focused on therapies for patients with rare diseases. The deal is valued at about $5.2 billion. To demonstrate the scale of the premium, NPS had a loss of $1.5 million on about $156 million in revenue in 2013.

What are the odds a competing bidder will show up? The termination fee is $156 million, almost triple the amount of cash, and 63% of current assets, of NPS as of September 30, 2014.

Shire follows Jay-Z’s advice.

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Dick’s Sporting Goods May Be A Private Equity Target

There has been some commentary that Dick’s Sporting Goods may be a good candidate for PE firms and is contemplating an LBO.

According to the article, at a premium, Dick’s could be valued at just under $8 billion.

Looking at the last year end numbers, Dick’s had current liabilities of about $1 billion, long-term debt of about $330 million against about $3 billion of total assets.  Sales had increased from $5.2 billion to $5.8 billion to $6.2 billion from 2012 to 2014.  Profit margins were 5%, 5% and 5.4% for those years.

Debt has increased a bit over the last few quarters to $1.3 billion in current liabilities and $733 million in long-term liabilities, against $3.7 billion in total assets.

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Wet Seal In Default On Loans, Closes Stores and Fires Employees

Wet Seal gets (very little) breathing room from lenders, but trouble ahead.

Wet Seal in trouble

It has been tough for clothing retailers as dEliA*s and Deb Stores recently filed for bankruptcy.

Is Wet Seal next?

Today they announced that the Company was closing 338 stores after landlords refused to cave into their demands. Those stores represented about 48% of its sales.

Wet Seal will be left with 173 stores and its e-commerce business. It is firing almost 3,700 employees.

This saga began in late December when the Company failed to make a payment on its convertible note. The lender called the note, which was about $28.8 million plus costs and expenses.

As of November 1, 2014, Wet Seal had about $93 million in total assets against $103.4 million of total liabilities, of which only $59.4 million was classified as current. The convertible note was listed in long-term liabilities at $13.9 million.

So, why couldn’t they cover the debt?

They lost almost $80 million during the 39 weeks ended November 1, 2014. Net sales were $316.3 million, but Cost of Sales and G&A alone were $362.7 million. They were hemorrhaging cash, beginning the period with about $39 million and ending it with about $19 million. The holiday season must have been awful.

The convertible note is payable in shares unless certain conditions are not met. Wet Seal did not announce why they could not pay in shares and did not file the agreements with the lender explaining the nature of the default, other than nonpayment.

Possible vulture candidate for high risk tolerant investors? Ask our clients.

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American Realty Capital Properties Responds to Corvex Management

Thanks for the attention.

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ARCP responds to Corvex Management

Underdisclosed favorite Corvex Management announced some intentions related to American Realty Capital Properties (NASDAQ: ARCP). To ARCP, the intentions were bad.

[Corvex believes] that it is beneficial to add representatives of the shareholders to the Board, particularly given the recent high level of personnel turnover at the company and the critical decisions the company is facing in the near term.

Translated: We’d like to be on the board to assist in directing management.

Consequently, the Reporting Persons have had discussions with the Board to explore the addition to the Board of a representative of the Reporting Persons and potentially other independent persons which might be suggested by the Reporting Persons. Further, the Reporting Persons have had and will continue to have discussions with the Board to share thoughts for enhancing value for all shareholders. Such discussions include, but are not limited to: business strategy and simplification, stabilizing and enhancing the value of Cole Capital, capital allocation, the search process for a new CEO and Chairman, and corporate governance.

Translated: We talked to the board and will continue to talk to the board until some changes are made.

The Reporting Persons may enter into discussions with other shareholders, industry participants and third parties in connection with all or some of the matters referenced in this Item 4.

Translated: Don’t make us call your father.

ARCP responded:

The ARCP Board of Directors is pleased that Corvex shares its belief that ARCP is an attractive investment. ARCP has had productive conversations with Corvex and be grateful for its support of the actions the Board has taken to date. The Board will continue to prioritize transparency and an open dialogue with all stockholders, as well as the best path forward for the Company and its employees, as it seeks to even out and strengthen ARCP.

Translated: We’ll keep talking until we are forced to do something.


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Some Light On The Xiaomi Valuation

The valuation on the recent financing for Xiaomi got a lot of attention. Here are some facts.

Upstart Chinese smartphone maker Xiaomi made some waves recently as its $1.1 Billion funding valued it at over $46 billion. The Wall Street Journal proclaimed that this made it the world’s most valuable startup, more than Uber and short of only Facebook’s 2011 private funding.

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Xioami releases some financial figures.

In four short years, it has 500 milion users. Yahoo Finance reports that its revenue more than doubled to $12 billion in 2014, selling 61 million phones in 2014. Its margins are very thin as it expands, and it expects the Chinese smartphone market to ease in 2015.  Apparently, Xiaomi CEO, Lei Jun, announced these numbers on some sort of Chinese Twitter, or “his official microblog account.”

In contrast, Apple sold 169 million iPhones and 68 million iPads in fiscal 2014.

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