Dotcom the Sequel

Society was finally embracing technology into their lives. Businesses that were capable of using the Internet as a second outlet to reach a wider audience saw themselves flourishing. The values of many Internet companies double, tripled, even quadrupled in just a few years, even though many never had a quarterly profit. The belief was that massive early expansion would eventually lead to massive cash flows and profits. Investors and corporations speculated on hundreds of publicly traded companies that were at historically outrageous prices. Then in March 2000, the bubble burst, and the formula that pushed up the NASDAQ and its technology components came crashing down. Between 2000 to 2002, $5 trillion of market value disintegrated, combined with the terrorist attacks. But that was a decade ago and a painful, expensive lesson. It was sure to never happen again, or would it?

Many journalists have brought up the idea that a second technology bubble is in the works and I have to agree. Facebook, the obvious poster boy of the debate, has seen exponential growth and valuations. Goldman Sachs's investment in Facebook worth $500 million values FB at $50 billion. Others like Groupon, Living Social, Twitter, FourSquare and even Zynga (develops applications used on Facebook) have seen valuations rise as well.

A few weeks ago, Google offered to buy Groupon for $6 billion but failed after Groupon rejected the offer. Groupon later raised $950 million from private investors. Twitter raised $200 million in December 2010 alone (Blog continues below).


Of course, one significant difference that many point out are the large revenue streams and cash flow. Facebook is estimated to have earned about $1.5 billion in 2010 and earned $800 million in 2009. Twitter also has an estimated revenue of $150 million in 2010 as well, but because these companies are private, these numbers can not be confirmed.

As said, Facebook probably earned $1.5 billion in revenue, not profit, last year and is valued at around $50 billion. To put that into perspective, Dell's current market capitalization is $27.2 billion, nearly half the value of Facebook, but generated $53 billion in revenue and net income of $1.4 billion. Companies like Starbucks and Texas Instruments are also worth less than Facebook but generate at least $1 billion in net income.

Of course, Goldman is clearly paying ridiculous multiples today for big returns tomorrow. But if Facebook does go public against its will, which it most certainly will (if a company has over 500 investors in the US, it must go public), how long before current holders push the sell button? A secondary market with massive liquidity would allow investors who want to get out an opportunity to sell their shares. At 41 times revenue and probably 350 times earnings, Facebook's multiples can only be supported with rapid growth never seen. Most established companies trade at about 15 times earnings. Surely, many investors will wait a few years, but how long before one quarter disappoints?

The most Facebook can grow is twelve times. At almost 600 million active users already and a world population not yet exceeding 7 billion, in which only 2 billion use the Internet, there really is little room for expansion realistically. Not only that, based on those figures, 600 million users earns the company about $1.5 billion. That means each active user generates only $2.50 annually, which sounds right, since I have never paid for anything on Facebook. Starbucks needs to sell just one beverage to match Facebook's awesome earnings power.

To be honest, I have very little experience with venture capitalism and do not find speculative buying combined with buy-and-hold a way to make money, but at these crazy valuations on Facebook and many other media sites, I'm confident in saying that I would never buy a Facebook IPO except to day trade it. Only time will tell how correct we all are though.

Netflix Ready for Another Pop?

Shares of Netflix [NFLX:NDQ] has been caught in a downtrend since it peaked at almost $210 back in November, but technical indicators are suggesting another bullish rally may be in store.

Although on just average volume, shares of Netflix surged $8.58, almost 5 per cent, today closing at $187.88, above resistance of $184.90 according to TradersHuddle.com. The move may have to do with four brokers reiterating their target on the company. Piper Jaffray and Canaccord Genuity have an overweight and buy rating respectively with price targets above $215 while one reiterated a neutral and one initiated a sell rating.

But if you're a strong believer in technical analysis, like myself, today's large swing was an eventuality. I had been watching the stock for quite some time and noticed the shares developed a pennant-like formation (see link for more info) since its correction in December and was days from breaking up or down. Today's upward move looks like it could be a continuation pattern from the bullish rally seen in November but we will have to wait two more days to see how the shares trade.

The MACD also reversed (see below) and looks like it may turn positive if the shares rise again tomorrow, giving traders a second buy signal.

Chart courtesy of www.bigcharts.com.

The company will be releasing its Q4 earnings on Monday January 24, 2011 which will include revenues from streaming its services into the Canadian market. A rally back to near $200 or above is not unreasonable as traders push the stock up in anticipation of another stellar quarter. Of course, expectations have been set high so selling prior to the earnings report AMC on the Monday could be a wise trade. Consider replacing your shares with a cheap weekly call or bullish spread if you still want to participate in the earnings on a less riskier scale.

Disclaimer: Neither I or any household members own shares or derivates of Netflix.

2011 Market Preview

The first trading day of 2011 has come and gone for the most part (some still closed in lieu of New Year's Day, including Canada, U.K., and Japan) and positive returns kicked off 2011 with most major world markets gaining well above one per cent. This bodes well for those with strong convictions in the January almanac.

Since 1928, when the S&P 500 ends the month of January with gains, the market has finished positive from the previous year 73 per cent of the time. More impressive: since 1950, when the first week of January finishes positive, 86 per cent of the time the market finishes positive as well, with an average of 14 per cent gains.

It's a little premature to be making predictions one day into the year and foolish to predict today's price action is a fair indicator for the rest of the week, but with more and more bullish news coming out of America, the fundamentals do support another positive year, even after a huge 50 per cent rally from the summer lows.

If you're still a non-believer in 2011, consider that since 1940, the end of World War II, the third year in a president's term have been positive averaging a 19 per cent rise. Although there have been years where gains have been limited to 2-6 per cent, it does indicate that 2011, historically speaking, would be a low risk year with potentially great returns. Not only that, the last two years of a president's terms have outperformed the major stock markets.

Of course, all these almanacs, historical data, and predictions won't matter if America decides to dip back into a recession-like state and corporate earnings fall off the tracks. We'll have to wait 365 days to see what analysts were right.

Commodities

Don't think the commodity story ends in 2010. Gold, silver, oil, and copper have all had huge rallies leading into the new year and expect that trend to continue, at least for the first half of the year. Asia's continued economic rise, America's slow but surely recovery along with a falling US dollar bodes well for commodities. Gold and copper continue to reach all-time highs, as well as silver, notwithstanding the Hunt brothers and oil has reached multi-year highs.

Trading Ideas

If you're animate that this year will finish positive but don't know by how much, the best trade would have to be writing barely in-the-money puts. In-the-money puts would expire worthless if the market surges above strike prices, especially in an extremely bullish year. They would also lose significant value if the market's gains are tepid allowing traders to capture as much time value as possible.

Some January 2012 put options have huge premiums, allowing people to earn ten per cent for at-the-money options. Apple, trading at just under $330 today, have 330 puts worth $42 or more. If Apple fell to $289, you would still make money!

Personally, I've always believed writing puts are more efficient than buying stocks, especially if the stock does not pay a dividend. It requires zero dollars and equal or less margin too. Just remember that if you are assigned, you'll need to forfeit the cash or margin to cover the purchase.

With that said, I would like to wish all my readers a Happy New Year and good luck trading and investing.