Tiger Global, They’re Gr-r-reat?

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In this year’s first quarter, Tiger Global took a new position in Zillow, exited Alibaba, reduced holdings in Apple, Amazon, and JD.com, and increased exposure to Etsy. Tiger Global’s actions are watched for their prowess exhibited, especially in the tech arena.

So when Tiger Global must release its quarterly holdings, it is reported and is read by many. Rather than list the positions and the changes, let’s us put them into perspective to add value.

Tiger Global was started by Julian Robertson protege,  Chase Coleman III. Tiger Global has started many things itself: a private equity fund, a venture capital fund, and a hedge fund.

It’s the hedge fund’s holdings of public domestic equities which must be reported on Form 13-F. The latest was released on May 16, 2016 for the quarter ended March 31, 2016.

As a hedge fund, Tiger Global profits when stocks price goes either up or down. These are long and short position. Long positions make money when a  stock’s price goes up and it’s only long positions that are required to be disclosed on Form 13-F. A hedge fund manager going long or short needs some guide when picking stocks which are either undervalued or overvalued.

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Tiger Global reported investment strategy is based upon a company’s future free cash flows. The “free cash flow” part is the cash generated by a company’s operations and available to shareholders. It also excludes cash needed for capital expenditures.

The “future” part is an estimate of cash flows to come. Tiger Global likes to buy “well-positioned companies” with stock price representing a low multiple to free future cash flows.

Here is the recipe: 1) Buy the company it’s undervalued and  2) Sell the company when it’s overvalued.  Tiger Global’s holdings can be placed on spectrum of those representing purchases to those representing sales.

And in the middle are positions which do not change. In the latest quarter, Tiger Global bought Zillow, so it could be considered undervalued and sold Alibaba so it could be considered overvalued.

Part of Tiger Global strategy means estimating the future cash, which is hard to do with new companies with short operating histories.  So it’s telling that Tiger Global, the hedge fund, trades companies which Tiger Global, the venture fund, took a pre-IPO position, such as Etsy and JD.com. Hedge fund managers at Tiger Global could be benefiting from a better understanding of the Etsy and JD.com gained from by the venture capital unit.

Tiger Global’s trades are difficult to replicate from the Form 13-F. For example, the short positions are not required to be reported.  Short positions work in reverse from long ones.

A short position makes money when the stock prices declines. Tiger Global takes short positions in “poorly – positioned” companies with high multiples to free future cash flows. Translations: companies which are overvalued.

So by following the Form 13-F, one only sees one side of any trade. But Tiger Global could be both short and long in a particular sector. In was disclosed by the Financial Times, that in the 4th quarter of 2012, Tiger Global shorted Nokia.  In the same quarter, Tiger Global also held a position in Apple.

So at the time, Tiger Global was long the best mobile company and short the worst mobile company. In addition, Tiger Global could have been executing trade by betting on the difference between Apple and Nokia, called a pairs or convergence trade.  

May be the best that can be learned from reading Form 13-F is: technology changes very quickly. Winners can become losers very quickly. By understanding  trends through the failures and fortune of  public companies, people in tech, especially founders, angels, and venture capitalists,  gain a better understanding of where they stand, their own positions.

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Theranos or Jagged Little Pill


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Theranos’ continuing travails can be found seemly in the Wall Street Journal. Today, WSJ reported the pursuit of Theranos by Walgreen and the aftermath of that decision. Ultimately, “Walgreen doesn’t expect to coup its investment of at least $50 million”; but that assertion is hard to swallow.

First of all, the investment appears to have taken place in September 2013; in the same month the trial arrangement was announced. In the annual report covering September 2013, Walgreen said “from time to time, we make debt or equity investments in other companies that we may not control or over which we may not have sole control.” So the quoted investment of $50 million could have been in the form of preferred stock or convertible debt.  

In the annual report, Walgreen goes on to state the risks associated non-controlling interests. Among the risks are those involving the operations and financials of the investment. Because it is non-controlling interest, Walgreen can not influence the management. Thus as stated in the article, Walgreen normally negotiates for the access to an investee’s clinical and financial records. This did not occur with Theranos.

Without direct control, Walgreen must “rely on the internal controls and financial reporting controls” of the investee. Essentially, Walgreen is placing its faith in systems established to produce results. In this case, Walgreen put its trust in Theranos’ controls.  Now given all that has transpired with Theranos, the following disclosure is a little bit ironic.

In the annual report, Walgreen states an investee’s “failure to maintain effectiveness or comply with applicable standards may adversely affect us”.  Walgreen understands the risks associated with any non-controlling interest; so in this case, Walgreen should not be surprised when swallowing this jagged little pill called Theranos.

Instacart Gets Millions from Whole Foods’ Investment

Instacart apparently received $4 million from Whole Foods. On February 23 2016, Recode reported that Instacart and Whole Foods extended their original partnership that began in September 2014. It was also reported Instacart received an investment. While Recode did not disclose the amount, it appears Whole Foods did.

Whole Foods made the $4 million investment sometime between July and September 2015, per filings with the SEC. The investment was reported using the cost method, which for accounting purposes means the investor owns 20% or less and/or does not control the investee.  In short, if Whole Foods is making a venture investment, it would be reported using the cost method.

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Whole Foods started making these types of investments in early 2014 by investing $10 million. The $10 million amount did not change until mid-2015 when it jumped to $14 million. Thus the $4 million amount.  And the amount of $14 million has not changed since last year.  So Whole Foods has not made any new investments.

It is not possible to confirm that Whole Foods’s $4 million investment belongs to Instacart. Whole Foods does not frequently make venture investments; a fund established in 2007 did not go anywhere. But if Whole Foods does or did make such an investment, it would be disclosed in the financial statements.

So all we can do now is connect dots, at least four million of them.

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Like Facebook’s New Higher EPS


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Facebook now thinks stock-compensation is important. Because of stock-compensation’s importance, Facebook will emphasize GAAP over non-GAAP results.  On a recent earnings call, Facebook CFO Dave Wehner declared

“Stock-based compensation plays an important role in how we compensate our employees and therefore we view it as a real expense for the business.”

Facebook must focus on stock-based compensation, not because it wants to, but because it must.  Under new accounting rules starting next year, all public companies must change the reporting of stock-based compensation for financial reporting purposes. Tech companies that use a lot of share-based compensation, the new rules may change amounts reported for net income and consequently earnings per share or EPS.

Going, Going, Gone.  In some situations, EPS is going up, but not for the reason you think. Earnings per share is just that, a comparison of  a company’s earning to its stock outstanding. Earnings are also known as net income and Facebook’s net income could be changing. Next year, public companies must include in net income items, which in some circumstances, increase net income and increase EPS.

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EPS represents the amount of net income you own as a shareholder. In this view, the shares of stock are not pieces of paper, but an actual company. In fact, shares are a fractional interest in the business and here, you own an interest in Facebook. EPS compares the amount of net income to the number shares outstanding. A company can increase EPS by either decreasing the outstanding shares through buy backs or by improving net income.

Bottom’s Up. Facebook’s EPS may automatically increase under  the new rules. Before going further, consider what would have happened if Facebook had use the new rules over the past five years. If that had happened, Facebook’s basic EPS would have increased 30% or more over the past five years (see below). For instance in 2012, instead of a basic EPS of $0.02, the figure becomes $0.97. For last year, instead of a basic EPS of $1.31, the figure now becomes $1.92.

Employee compensation is an expense for financial reporting purposes and a deduction for tax purposes. Tax deductions reduced expenses and increase net income. If the tax deduction increases, the amount of net income increases. When stock-based compensation is granted, companies must estimate the deduction for tax purposes. Often the final tax deduction can change from the one estimated, and under the new rules, can cause more net income.

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Cha-cha, Changes. A company has more net income when the change is more than the tax amount originally estimated. That can happen when the stock price increases from the granted date of a stock option and to the date the option is exercised. For restricted stock, it is the time between the grant date and the date the stock vests.  If the stock price increases, the tax deduction is higher than expected. The extra deduction amount will now be reported as net income under the new accounting rules.  $1.7 Billion was the extra-amount for Facebook in 2015.

For Facebook, the amount is large due in part to Facebook’s success and its use of stock-based compensation especially in acquisitions. For example, Facebook issued 46 million restricted stock units (RSU) to Whatsapp employees in October 2014 which vest over a period of three year. So sometime between now and October 2017, Facebook’s net income could be impacted by those RSUs and the new accounting rules.

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Leaked: Business Insider’s 2015 Financials

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Well not really leaked, but sensational headlines often attract attention. Actually the information is contained in the 2015 Annual Report of Axel Springer, the German publisher which purchased Business Insider (BI). Dated March 1, 2016, the Annual Report provides operating information for at least one new media property.

In total, BI had approximately 68 million monthly views for all of 2015. That figured represents a 46% year over year change. Fortune had reported the monthly views at 72 million in an article at the time of the acquisition. In addition, the mobile, USA version of BI had an average 28 million monthly views. That amount represented a 69% year over year change.


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Axel Springer reported for 2015, Business Insider earned approximately $42 million in revenue and had loss of $13 million*. Axel Springer hopes to earn its money spent on the acquisition by developing BI’s brand portfolio, expansion of the fee based BI Intelligence, and expanding into new international markets. In fact, this month BI expanded into Poland and the Nordic countries.

Along with BI, Axel Springer has investments in other new media properties, such as Ozy Media and NowThis. In October 2015, a minority interest in Thrillist Media Group was purchased for a reported $54 million. It turns outs that the minority interest was approximately 25% as reported in the 2015 Annual Report.

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It is worth noting that Axel Springer made its initial investment of $25 million in Business Insider in January 2015. The initial stake was 8.70%. The initial investment was made by Axel Springer’s corporate venture capital unit founded in 2014 and located in Palo Alto. As reported, Axel Springer acquired the controlling interest of 96.50% in October 2015 for $450 million.

So this could be Axel Springer’s strategy for new media: first take a minority interest and then later seek full control while offering some equity to the talent. In the BI deal, “management board members” received a total of 21,952 new stock options to purchase stock in Business Insider, Inc. Thirty percent of the option vest after three years and the remainder vest at 10 percent each year for the remaining seven years.

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*Axel Springer reported 38 million euro revenue and 10.8 euro net loss. Amounts translated into dollar as of March 2, 2016 at 1 euro to 1.086 dollar.

Yelp’s ***** Labor Issues for ’16


Yelp’s recently filed (May 6th) Form 10-Q included some continuing labor issues.

First of all, Yelp’s ongoing IRS payroll audit will not be finalized until the end of the year. The tax years of 2013 and 2014 are under audit by the IRS. Yelp currently estimates at least $500,000 will be due to the IRS.  At the end of the last year, Yelp thought the amount would only be $300,000. The final amount will not be finalized until December 31, 2016. Yelp did not state the reason for the initial assessment.

Secondly, Yelp purchased Eat24 in February 2015. Along with the acquisition came several lawsuits which slipped through Yelp’s due diligence during the negotiations to purchase Eat24. One filed in June 24, 2015 by a former Eat24 employee claims that she was not paid required wages and overtime wages among other issues. Yelp has agreed to settle the dispute and has estimated it will need to pay up to $200,000. The settlement needs approved by the court once it has been finalized by Yelp and the plaintiff.


Twitter Adds More Characters, M and A

Twitter wants to grow, maybe up, by doing more acquisitions. On the April 26, 2016 conference call, Chief Financial Officer, Anthony Noto said as much given Twitter’s more than $3.5 billion in cash. Acquisitions would be in the vane of Fabric, Vine, and Periscope.  Mr. Noto said he would also consider acquisitions which expanded the Twitter platform and involved ad-technology.  

Unlike, Alphabet or Facebook, Twitter has not used merger and acquisitions as part of its growth strategy, so that could be changing.  In addition to Mr. Noto’s statements, Jessica Verrilli tweeted the question – Want to work on acquisitions at Twitter? – on May 6th and then linked to a job posting for a Corporate Development Associate. Ms. Verrilli is senior director of corporate development at Twitter.

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Twitter may be increasing the size and/or pace of future acquisitions by adding more staff. The recent job posting required that candidates have experience with “large and/or complex” deals such as cross border transactions or transactions involving public companies.  The position is advertised  as an “unique opportunity” to be part of “broader strategic efforts at Twitter”.

Twitter Ventures may also be part of that broader strategy.  Twitter Ventures was started last year by former Twitter CFO and employee, Mike Gupta.  There has been four known investments so far – Cyanogen, Swirl Networks, VenueNext, and Muzik. Of these four, VenueNext, which does technology for live events, is noteworthy given Twitter recent deal with the NFL.

Twitter Venture invested an estimated $18 to $21 million last year and $5 million in the first quarter of 2016. Twitter does not disclose separately its investments; instead the amounts show up on its statement of cash flows and its balance sheet as other assets. For example, in the first quarter of last year, it appears Twitter Ventures spent $2 million. That was the same quarter  of the Cyanogen investment.

Until recently, Twitter deal size has been modest when compared to its peers (Facebook, Apple, Alphabet etc). Vine was purchased for $30 million and Periscope purchased for $100 million. Fabric came together from the purchase of MoPub for $219 million and Crashlytics for $38 million.  One of largest transaction so far has been the digital ad platform, TellApart, for $479 million. Twitter used mostly stock, not cash, for purchase of TellApart in 2015.

Mr. Noto and his team need to move quickly. Of the $3.5 billion cash quoted in the conference call, $2.0 billion is on loan. The loan come from two convertible notes sold to institutional investors in 2014. The first note of $1 billion is due in 2019 and the remainder, $1 billion, is due in 2021.  Since notes are convertible, Twitter may get away with paying stock instead of cash, assuming the planned acquisition prove to be successful and increase Twitter’s stock price.


Alphabet Bets Really Big on Startups in 2016

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Alphabet invested an estimated $100 million in new ventures during the first quarter of 2016. That and other information about Alphabet’s corporate venture capital activities were disclosed in its recently filed Form 10-Q.

Blackout. Google Capital and GV funnel Alphabet’s cash into new ventures. The two units are part of Alphabet’s other bets. After the reorg last year, Alphabet has provided investors with more disclosure about the non-Google activities. But mostly, the other bets are lumped together as one line number on the financial, so the transparency is well, not so clear.

From the 10-Q, filed near the end of April, we know that Alphabet invested an average of $5 million on startups during the quarter. Based upon information from Crunchbase, Google Capital invested in three companies – Pindrop, Girnar, and Cardekho. GV was busier by investing in 16 companies (see table below).

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Red. Read more closely, the 10-Q tells even more about GV and Google Capital.  Total investments in private companies went from $2.6 billion to $2.7 billion, or an increase of $100 million for the quarter ended March 31, 2016. Alphabet is accounting for these investments under the cost method, which means it generally owns less than 20% of the company and/or does not exert any significant control.

Alphabet also values GV and Google Capital investments at $7.8 billion for the recent quarter. That value increased by $300 million from the beginning of 2016 when the fair market value was $7.5 billion. Alphabet estimates the fair market value using private market transactions, since public market transactions are not available.

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More Green. After some adjustments, Google Capital and GV holdings’ appreciated 3% during the quarter. Here is how. The fair value increased $300 million during the quarter, from $7.5 to $7.8 billion. The fair market value can increase due to additional investments and by appreciation.

So from the $300 million, we must subtract the known additional investments of $100 million. Thus we arrived at the assumed appreciation of $200 million or 3%.

But the $100 million is an really important amount, especially at this time. In the past five years, non-venture capital money has followed into Silicon Valley from hedge funds, sovereign wealth funds, family offices, and mutual funds. It seems these players are now pulling back.

So it may be good know that, money is still following into the sector.

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Jack in a Box? Twitter’s Ongoing IRS Tax Audit

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Twitter Inc. today (May 3rd) released its Form 10-Q for the quarter ended March 31, 2016. Buried inside the 10-Q, Twitter disclosed its IRS audit has not been completed. Twitter Inc. is being audited for the tax years of 2011, 2012, and 2013. Based upon SEC filings, the audit has been going on for over a year.

Tax Man, Oh Yeah. Twitter first disclosed the Federal tax audit in the third quarter of 2014. At the time the IRS was only look at the tax year of 2012. But then in the next quarter, the fourth quarter of 2014, the IRS expanded the audit by examining the prior tax year of 2011. Finally, in the first quarter of 2015, Twitter disclosed that the IRS was also looking at the tax year of 2013.

Twitter has not had taxable income in its history. In fact as of December 31, 2015, Twitter has tax loss carry forwards of $3.37 billion. That amount can be used to reduce any future taxable income. Said another way, Twitter will not owe any Federal income taxes for long time.

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Lucky Charms. So the IRS could be looking into other tax issues. For example, the IRS may be interested in the tax strategy which allows companies to shift domestic income overseas. This strategy is common among tech companies such as Google, Apple, Microsoft, and others. Taxable income is sent to other places with lower tax rates than the United States such as Ireland.

It easy, especially for tech companies, to execute this tax strategy due to intellectual property. Here how it can work: a U.S. tech company transfers a patent to a subsidiary in Ireland. The Irish subsidiary then charges the U.S. parent a royalty to use the patent. The payment by the U.S. company reduces the its taxable income. And the royalty income received by foreign Irish subsidiary is taxed at low rate.

As long as the cash received by subsidiary stays in Ireland, the income is never subject to U.S.taxes. This is one reason tech companies hold so much of their cash overseas. It is another reason why Apple issued bonds to pay dividends to shareholders; otherwise, by bringing the back the cash to the U.S., Apple would have been required to pay more in Federal taxes.

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Jack in a Box? All this brings us back to Twitter. Twitter established and currently has an Irish subsidiary. Twitter move its international operations to Dublin in 2011. Twitter also disclosed in the recent 10-Q, that it had overseas cash of $160 million, that if return to the U.S. would be subject to taxation.

One can only speculate why the IRS is looking into Twitter. And it could only be coincidence  that the IRS is expanded its audit from 2012 into 2011; the same year Twitter established a presence in Ireland. For example, upon auditing the tax year of 2012, the IRS could have discovered something which caused them look into the prior year of 2011.

Twitter’s tax audit is important because it come mean the IRS is taking a closer look into the tax practices of tech companies as happen with Google, also in 2011.

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Intel Capital’s Portfolio Decreases 10%


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Intel today (May 2th) released its Form 10-Q  for the quarter ended April 2, 2016. While everyone paid attention to other things, the most important number was the current valuation of Intel Capital’s portfolio companies. The valuation of the portfolio decreased by 10% from the quarter ended December 26, 2015.  

Inside Intel. Intel Capital’s portfolio was valued at $2.3 billion at the quarter end of April 2, 2016 while the portfolio had a value $2.5 billion at the end of December 26, 2015. Over the quarter, the portfolio declined by $200 million as estimated by Intel. Portfolio companies generally do not trade on public markets. Intel must value their  “non-marketable investments” using other valuation methods.

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Intel Capital did not make any significant investment in new companies over the quarter ended April 2, 2016. Total amount invested, $1.5 billion, remained the same during the recent quarter.

Power Failure. In addition, there were no write-downs, impairments, of the investments during the current quarter.  For accounting purposes, Intel would need to write-down an investment if there were  a significant change in the value of an investment.  Last year was an exception; Intel wrote-down $160 million of its Intel Capital investments.

Fund companies must also value their  investments and some on more frequent basis than Intel. For example, Fidelity updates its holdings on monthly basis. Last week, Fidelity raised the value of its holdings. Like to Intel, Fidelity and other fund companies must value their holding using other methods than market prices.

The difference, between the valuation of Intel and the mutual fund companies, is the life cycle of the company. Intel Capital is investing in early stage companies while the mutual companies are investing at the later stage companies.

More Chips? The chart below reflect the changes in the Intel Capital portfolio’s carrying value (CV) and fair value (FV) over the past two years. Carrying value is the actual amount invested in portfolio companies. The amount invested increased from $1.3 billion at the end of 2014 to $1.5 billion at the end of the current quarter. Intel investments in Cloudera and UniSpreadtrum were excluded from the reported amounts since the two companies  not Intel Capital portfolio companies.

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