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Archive for June, 2011

Five reasons to invest in Taomee IPO (TAOM)

Ask a random adult in the U.S. if they’ve heard of Taomee, and you’ll probably get a blank stare. Ask a child in China the same question, and they’ll probably say yes. Taomee Holdings Ltd. (Public, NYSE:TAOM) operates the largest online entertainment community for children in China. Most of that community is centered around www.61.com, where Taomee has launched several interactive virtual worlds for children with names like “Seer” and “Mole’s World.” Although Taomee’s shares fell on their first day of trading, the company’s growth prospects are just too powerful to ignore. Here are five reasons to consider investing in Taomee:

1) Fairy tale sales. It’s hard to argue with cold hard cash, and Taomee’s growth has been startling. Total net revenue quintupled in 2010 to $36 million compared to 2009, per the Wall Street Journal. Net income was nearly as impressive during the first quarter of 2010. It almost tripled to $9.1 million.

2) Solid management. Taomee’s chief financial officer, Paul Keung, walks the walk. He was trained and educated in the U.S., so he’s well-versed in the American financial markets. That gives Taomee a leg up over domestically-insulated companies. A series of accounting scandals have shaken investor faith in Chinese ADRs. The fact that Keung’s poring over the books should allay some of those sector-wide fears.

3) Scale. Some 89.6 million children in China between the ages of five and 15 accessed the Internet in June 2010. More than 30 percent of that population (27.3 million) accessed Taomee’s site, 61.com, during the first quarter of 2011, according to iResearch.

4) Multiple revenue streams. In many ways, Taomee’s story reminds me of game-maker Zynga – the creator of the popular iPhone and Android game Angry Birds. Zynga’s success with Angry Birds has poured over into the real world with a line of plush toys and a movie in the works.

Similarly, Taomee is significantly growing its offline presence through children’s books, children’s magazines, partnerships with clothing and beverage makers and several massive film and television projects under development. These aren’t just pipe dreams, either.

According to Beijing OpenBook, two of the Top 5 best-selling children’s books in China last year were based on Taomee franchises. Even more intriguing: Taomee’s co-producing two animated TV series and two feature films based on “Mole’s World” and “Seer.” The company has plans to release more than 100 episodes of its animated series – a fact that should significantly boost traffic at 61.com. The company’s feature films are expected to debut this year.

5) Be greedy when others are fearful. I’m starting to think it could be the best possible time to buy stock in Chinese tech companies. Mutual funds – even stock brokerages – are nervous about shoddy accounting practices in China, and that’s led to wholesale sell-offs for a number of New York-traded Chinese stocks. You know it’s bad when even Baidu.com, Inc. (NASDAQ:BIDU) isn’t immune. The Chinese search engine company has shed nearly 20 percent since April. That makes the high-powered growth at companies like Taomee particularly attractive – provided, of course, the numbers we’re seeing are genuine. If they’re true, though, Taomee could be a bargain.

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Why do companies go public?

Why do companies go public?

Every month or so, a high-profile technology company makes headlines with an IPO (or initial public offering) of stock. By doing so, those companies are transforming themselves from private corporations to public corporations. That transformation costs millions of dollar and brings with it a whole lot of intense scrutiny from the media and investment community. It also threatens to change the corporate culture of a company and fixate it on short-term rather than long-term results. And yet, nearly 100 companies held IPOs last year (excluding ADRs, REITS, limited partnerships and a few other categories). Why did they take the plunge? Here are the Top 3 reasons companies go public:

1) Boatloads of cash. When a company goes public, it’s actually trading equity for cold hard cash – and lots of it. Just how much money is at stake? That depends on the company’s profitability and prospects for growth. Russian search engine operator Yandex (NASDAQ:YNDX), for example, raised $1.3 billion on May 25 in exchange for 16.2 percent of the company’s equity.

After an IPO, a company’s free to use that cash however it sees fit, and it never has to repay a penny (not a bad deal, eh?). Most companies use that money to pay down debt, acquire new businesses or invest in future growth. Often, companies do all three. The catch is, the company must release detailed quarterly financial records that adhere to strict standards set by the SEC. Investors then use that financial data to determine whether or not that company is a good investment.

2) Brand awareness. Since it costs so much (typically between $10 million and $30 million a year, per SFGate.com) to satisfy the accounting and legal costs associated with being publicly-traded, most companies prefer to take the easy route and remain private. Companies that do decide to go public get boatloads of press, consumer awareness and exposure for new products. Because it’s so difficult to go public, the act in itself lends a new level of cachet or prestige to a brand. All told, BusinessWeek lists just 33,000 public companies around the world.

3) Playing with the big dogs. The world’s largest private company (according to Forbes) is Cargill. The agribusiness company logged estimated sales of $109 billion in 2009. Compare that with Exxon Mobil Corporation (NYSE:XOM), which regularly tops lists of the largest public companies in the world. Last year, XOM’s sales exceeded $430 billion – nearly four times as much as Cargill’s 2009 sales.

Going public gives companies a competitive advantage for a number of reasons. Most importantly, they have access to more capital, and they can get that capital for cheaper than their private counterparts. In addition, public companies are no longer subject to SEC rules that limit private companies to fewer than 500 shareholders. That means public companies can offer bigger pools of employees equity stakes. That gives them a powerful tool to recruit and retain the top talent in their respective industries.

Because public companies have access to more cash, they can also buy out competitors and start-ups, using acquisitions as a tool to fuel growth. Since Google, Inc. (NASDAQ:GOOG) went public in August of 2004, for example, the search engine has acquired more than 85 other companies as it expands into new areas, buys new revenue sources and speculates on up-and-coming technologies. Smart acquisitions help bolster bottom lines for public companies that are eager to keep their shareholders happy. And the larger those companies get, the more acquisitions you’re likely to see.

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Do China Dangdang shares look attractive? (NYSE:DANG)

It’s been a rocky ride for shares in E-Commerce China Dangdang, Inc. (NYSE:DANG). Stock in the China-based online retailer debuted in December at $29.91 a share. Yesterday, those same shares closed at a new 52-week low of $15.56. That’s a drop of nearly 48 percent. Yet, I’m still optimistic about Dangdang’s future. Here are three reasons to consider buying into the so-called “Amazon of China” – even at today’s depressed prices:

1) Dangdang’s drubbing is temporary. One of the biggest reasons Dangdang’s shares have been falling comes down to simple supply and demand. Insiders who were previously locked out of selling their shares now have that right as the post-IPO lock-up expires. Just 19 million ADRs were trading last week. With the lock-up expiration, there are now more than 58 million ADRs on the market, per CNBC. Insiders who want to turn their paper holdings into currency now have that right, and it’s going to take the market a while to absorb that glut of supply.

2) Unrivaled sales growth. A recent report from SmarTrend named Dangdang the No. 1 Internet Retail stock in the world in terms of sales growth. Sales are expected to grow more than 113 percent from $375.9 million last year to $802.1 million in the next fiscal year. That puts DANG ahead of investor darlings like Netflix, Inc. (NASDAQ:NFLX), Priceline.com Inc. (NASDAQ:PCLN) and even Amazon.com, Inc. (NASDAQ:AMZN).

3) Setting the stage for even bigger growth. Dangdang’s aggressively expanding its product offerings, fulfillment facilities and accessibility as it faces fierce competition behind the Great Firewall. During an earnings call last month, Chairwoman Peggy Yu Yu made it clear the company’s not ready to start milking DANG for profits, but rather it’s fixating on setting the stage for future growth. We’ll “keep plowing whatever gross margin we make back into operations,” Yu Yu said.

Already, the scope of the site is expanding. Total orders surged 40.9 percent year-over-year last quarter, and the company’s total number of active customers grew by 42.3 percent. The site’s most impressive growth came from third-party merchants, with sales screaming up 242.9 percent. If those trends stay intact, Dangdang stands to make long-term investors a whole lot of yuan.

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Three reasons to invest in the Square IPO (when it finally arrives)

One of the more exciting start-ups in the tech space comes in the form of a pocket-sized, half-inch plastic square. Said plastic square can be plugged into the audio jack on your iPhone, Andoid, iPod or iPad and transformed into a mobile credit card processor. That’s the premise behind Square – an inspiring start-up with 100 employees based in San Francisco. The IPO rumors haven’t started up yet, but there are lots of reasons to be excited about this small company (even before we’ve gotten a chance to look at any financial documents). Here are three reasons to invest in the Square IPO (when it finally arrives):

1) Leadership. Investing icon Warren Buffett argues that you shouldn’t invest in companies but rather people. “You can have the greatest goals in the world, but if you have the wrong people running it, it isn’t going to work,” he said recently. “On the other hand, if you’ve got the right person running it, almost anything is possible.”

Without question, Square’s got an excellent pedigree. One of the company’s co-founders, Jack Dorsey also co-founded Twitter, rising at one point to serve as CEO (he’s now a chairman working on product development and growth). That takes up a mere 8 to 10 hours of his day. After that, he ambles down the road to clock another 8 to 10 hours of work at Square.

“Most people have major positions at companies and they’re also raising families,” Dorsey told Fortune last week. “They have two-year-olds. I have it easy.”

Best of all, Dorsey seems to possess a sense of a wonder that he uses to inspire the developers working below him. He does that in part with his weekly “town square” meetings where he takes 15 minutes or so to talk values and aspirations with his employees.

In a recent town-square meeting, he compared what Square’s doing to building the Golden Gate Bridge: “Every single aspect of this is gorgeous,” he said (per TechCrunch). “So your homework this weekend is to cross this bridge, think about that, and also think about how we take those (design) lessons into doing what we do, which is carry every single transaction in the world.”

2) The volume game. Numbers aren’t readily available, but we do know that Square is “processing millions of dollars in mobile transactions every week,” according to NPR. Let’s conservatively say the site’s processing $2 million in transactions weekly. That’s good for more than $225,000 in revenue. Not bad for a company that just opened its doors to clients nine months ago. The key here is scale. By poaching a huge number of transactions and reaping 2.75 percent of every sale, the company needs to consistently grow it’s user base to move toward profitability. The numbers look good so far.

3) The writing on the wall. Your head is planted firmly in the sand if you’re not convinced that credit cards are going the way of the dodo bird. In fact, I’d argue that it’s not just your head that’s buried in sand; it’s your torso, midsection, legs and feet, too. The smartphone is transforming into a mobile wallet. Every major credit card company in the world has started forays into the mobile payment processing realm and few have made it as simple as Square.

Merchants get their card readers for free. They pay no monthly fees, and they can use it as little or as often as they like. In fact, we might even use it to give our friends a few bucks for the cab we’re sharing one day. If Square can keep gobbling up marketshare while PayPal, Visa, Mastercard and others are still scribbling on whiteboards, they’re either going to IPO or get bought out. And either scenario will likely be a boon for shareholders.

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5 reasons LinkedIn’s stock is set to plunge (LNKD)

Since its IPO on May 20, 2001, shares in LinkedIn Corporation (NYSE:LNKD) have tumbled 35 percent from a first-day high around $120 to $78 a share. That’s still 73 percent higher than the IPO price set by Morgan Stanley, Bank of America and JPMorgan Chase. And yet, not everyone’s convinced LinkedIn’s future looks like a fairy tale. Here are five reasons LinkedIn stock forecasts might be overly optimistic and a fall from grace could be overdue:

1) Small numbers. For the nine months ended Sept. 30, LinkedIn netted $2 million on revenue of $161 million, and the company is forecasting a loss for 2011 as it looks to aggressively expand its user base. Not only are the profit margins fairly small at LinkedIn, they’re going to be shrink as the company gambles on growth at the expense of profits. Ongoing losses could force out speculative investors with short investing timelines. Even the company’s initial IPO valuation at $4 billion “assumes an $100 million-plus in 2012 net, along with a Google-like growth trajectory for the next 5-10 years,” writes Promod Radhakrishnan at SeekingAlpha. Those are heady numbers for any company – even one with the clout of LinkedIn.

2) Narrow context. Investors and analysts seem overly eager to dub LinkedIn the next Facebook. The fact is the site serves a niche (white-collar employees and recruiters) that faces practical limits. All told, there are roughly 150 million people in the U.S. workforce. Of that number, approximately 60 percent (or 90 million) hold the professional, managerial and/or sales jobs that dominate LinkedIn’s user base. At the moment, LinkedIn claims more than 100 million users, and the U.S. market could be reaching maturity. Growth will likely be powered outside of the country where native start-ups are directly targeting LinkedIn. Facebook, which doesn’t serve a limited niche, will – by default – appeal to a broader user base (and likely grow faster as well).

3) “This is a sideshow.” To say LinkedIn’s meteoric valuation has professional investors scratching their heads is a bit of an understatement. Lawrence Haverty who helps oversee $35 billion at Gamco Investors, Inc., put it bluntly in an interview with BusinessWeek: “This is not something we even consider investing in. This is a sideshow. It’s a magic show. The only question for the investor is how soon they should sell.” Per Haverty’s EBITDA analysis, shares should be trading closer to $35 a share – not $80.

4) Insider selling. Six months from now, more than 85 million LinkedIn shares held by company insiders will start to be eligible for trading. That means the public’s been swapping back and forth a mere 7.8 million of the 95 million shares outstanding. Once supply and demand begins equalizing (and LinkedIn employees look to cash in on their paper wealth), prices could fall quickly.

5) Shorters aren’t in short supply. LinkedIn bears have borrowed 65 percent of the shares available for shorting, according to Bloomberg. That makes it the sixth-most shorted stock in the S&P by percentage. Indeed, the average S&P stock has a mere 8.2 percent of short-eligible shares actually sold short. There are a lot of folks betting on LinkedIn making lots of cash, but rest assured their are just as many convinced the stock’s setting up for a dramatic collapse. My guess is, the pros are short, and they’re probably going to make a fair amount of cash in the months to come.

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