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Netflix (NFLX) shares in a bear market?

Netflix (NFLX) shares have been streaming downward over the past month with the stock shedding 20 percent of its value in 30 days. What’s the standard definition of a bear market? A price decline of 20 percent or more.

What gives? There’s been a barrage of issues plaguing the stock, but I pin the rapid decline on four factors:

1) Profit-taking. Netflix was the best-performing stock in the S&P 500 last year rocketing up more than 300 percent. Weakness in 2014 means big investors are taking profits.

2) Apple + Comcast + Amazon. Rumors about Netflix’s competitors continue to swirl. Apparently, Apple (AAPL) in talks with Comcast (CMCSA) to form a joint video-streaming service. In addition, Amazon’s planning to offer free (yes, free!) streaming content to all web users.

3) Market correction. It’s been risk-off in the market this month, and the Nasdaq in particular has gotten hit hard. While conservative stocks have held up relatively well, tech leaders and biotechs plummeted (Netflix included).

4) New expenses. In the near-term, it looks like net neutrality is going out the window. The two companies that are going to get hit harder than any others by that are Google (thanks to YouTube) and Netflix. Exact costs are unclear, but they won’t be trivial.

These factors have some forecasters poo-pooing Netflix. Wedbush, for instance, just reiterated its $175 price target for Netflix over the next year. That would be a decline of more than 50 percent from current levels.

A stock’s ‘sex appeal’ plays big role in price

Last summer, a friend of mine asked me what I thought about investing in Tesla (TSLA). At the time, Tesla had shot up from $30 to north of $100. It was up more than 250 percent in the space of a few months. I told my friend we’d missed the boat. The stock had run too far too fast.

Boy was I wrong. Telsa has more than doubled since then. And that leads me to my thesis for this post: investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world. Put another way, they trade on hope, hype and hot air.

And yet, we can’t discount the power of a transformative company or CEO to grow into incredibly high expectations for a stock. The example I like to give is Amazon (AMZN). People complain about the valuation of a company like Facebook (FB), which is trading at a P/E of 92. But people aren’t that surprised Amazon’s trading at a P/E of 587!

And yet, Amazon is one of the few tech stocks that’s trading well above it’s dot-com highs from the late 1990s. 15 years ago, Amazon was just an online bookseller. Today, it’s a retail shopping giant, a media powerhouse for online movies, music and books, a hardware manufacturer, a cloud hosting company and a database of product reviews that’s unrivaled. Amazon has lived up to the hype.

Not every company lives up to the hype, of course, but you can’t deny that a few companies do. With that in mind, here’s my stab at a list of the Top 12 stocks with the biggest ‘sex appeal’ right now:

  1. Tesla (TSLA)
  2. Facebook (FB)
  3. Netflix (NFLX)
  4. Amazon (AMZN)
  5. Twitter (TWTR)
  6. Plug Power (PLUG)
  7. Pandora (P)
  8. RF Micro Devices (RFMD)
  9. Under Armour (UA)
  10. NQ Mobile Ads (NQ)
  11. 3D Systems (DDD)
  12. HEMP (HEMP)

I’m going to start blogging more about each of them regularly in the future so stay tuned!

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Three reasons to invest in the Shutterstock IPO

While you might not be familiar with Shutterstock, you’ve probably seen their wares on the internet, book covers or posters hundreds of times. Shutterstock operates a stock photo site which lets subscribers download pictures to print or post online next to news articles, and/or as part of a Web site’s design. All told, Shutterstock has some 19 million photographs and graphics available to license for online and print use.

While the company may not be the most glamorous tech company vying for investor dollars, but I still think buying shares makes sense. Here are three reasons why:

1) The subscription model. Unlike some of its competitors, Shutterstock really pushes its subscription model. That means customers keep ponying up as much as $250 a month to use the service. Not only does a subscription model breed long-term business relationships, it’s a more reliable revenue stream than the advertising dollars that most websites compete for. The proof is in the pudding. For the year ended 2011, Shutterstock earned 21.8 million on a revenue of $120.2 million (per the company’s S1 filing).

2) Powerful growth. Revenue at Shutterstock grew 44.5 percent in 2011 – not just in the U.S. but around the world:

And the company is in an industry that’s experiencing tremendous growth. BCC Research estimated the online image marketplaces would grow 51 percent a year between 2008 and 2013 to a total of $2.0 billion in 2013. With more than 32 percent of U.S. businesses still without a web site (and millions of potential customers in countries like China), Shutterstock should be able to sustain double-digit growth for years to come.

3) Consolidation, anyone? While Getty Images dominates the stock photo industry thanks to its strong ties to newspapers, Shutterstock could give the company a run for its money by acquiring some of its competitors. Indeed, that could be exactly what Shutterstock execs have in mind.

“We may use all or a portion of the net (IPO) proceeds to acquire or invest in complementary companies, products or technologies, although we currently do not have any acquisitions or investments planned,” Shutterstock writes in its S1 filing. If it can acquire one or two key competitors, the company will be able to quickly ramp up profits – and look to establish itself as a long-term player in the stock photo business. I’d be nervous if I were Getty.

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Three reasons to invest in the Alibaba IPO

Now that Yahoo Inc.’s (NASDAQ:YHOO) freeing up 20 percent of Alibaba’s shares, the Chinese tech giant Alibaba can begin preparing for its IPO. Expect a lot of fireworks as Alibaba’s one of the most exciting tech companies behind the Great Firewall. Here are three reasons to consider investing in the Alibaba IPO:

1) Fingers in a lot of pots. Summing up Alibaba’s internet operations is a bit like trying to describe Microsoft’s software offerings. They both do a hell of a lot. Alibaba’s most promising properties, though, are Alibaba.com (a business-to-business commerce site), Taobao.com (an eBay-like auction and Buy It Now site), eTao.com (a shopping search engine similar to Google Products), a cloud computing division, and Alipay (a PayPal-like payment processor for online transactions in China).

2) Rapid growth. One of the easiest ways to see how fast Alibaba’s growing is to look at Yahoo’s returns. In 2005, Yahoo invested $1 billion for a 40 percent stake in Alibaba. Now, they’re selling half that stake for $7.1 billion. Their full stake is worth some $14 billion, and that means they’ve made 14 times their money in seven short years.

3) The fat part of the curve. For most Westerners, buying and selling products online is second nature. That’s not the case in China. The country’s still in the fat part of the growth curve for e-commerce. Indeed, China’s online shopping industry is expected to grow by 42 percent this year (per Bloomberg). Contrast that with the U.S. where Q1 2012 e-commerce growth stood at 17 percent (per comScore). As China’s largest e-commerce provider, Alibaba stands to rake in a big part of that 42 percent growth.

Already, Alibaba’s pulling in substantial profits. The company generated $2.3 billion in the year ended Sept. 30 ($1 billion more than the previous year) and posted a profit of $268 million.

While we don’t know Alibaba’s IPO date yet, it is expected to come by the end of 2015 at the latest.

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Qunar IPO: 5 reasons to invest in China’s travel site

We don’t have a Qunar IPO date yet, but the company has announced plans to debut on U.S. stock exchanges next year. Here are five reasons to consider investing in Qunar.com:

1) Reach. Since Qunar.com’s launch in February of 2005, the Chinese travel site has become the 84th most popular Web site in China (per Alexa). In Q3 of 2011, it surprised traffic at competitor Ctrip.com (CTRP), and growth looks like it’s still in a powerful uptrend:

The company claims 51 million unique visitors a month. And that’s while online travel bookings are still in their nascent stages in China. Qunar expects more than half of all travel bookings will take place online within three years.

2) Thumbs up from Baidu. Baidu.com (BIDU) invested $306 million in Qunar in June. That makes China’s biggest search engine a majority shareholder in the travel site, and that’s good news. Working alongside Baidu is much better than competing with it. Currently, the companies cross-promote their services and they’re working on developing new offerings together. Getting a stamp-of-approval from Baidu practically guarantees the site will be the No. 1 travel site in China for years to come.

3) Monopoly anyone? Qunar has very little direct competition in China. Ctrip.com International, Ltd. (NASDAQ:CTRP) qualifies but only loosely. Ctrip acts more like an old-school travel agent processing a large number of offline bookings via call centers. Qunar makes 80 percent of its revenue off advertisements that pop up alongside results on its travel search engine (per the Wall Street Journal). As the company expands the ability for users to actually book travel online, revenues should climb.

4) Buying binge. Part of the reason Qunar plans to go public is to raise cash to help finance future acquisitions. That should help the company consolidate it’s position at the top of the market and immediately boost revenue for the company. While we haven’t seen any numbers, Qunar claims it’s already profitable. Growing it’s profitability without bloating its staff of 800 will be key moving forward.

5) Mobile ready. Qunar’s dumping lots of that investment capital it got from Baidu into mobile apps. Currently, the site’s got the No. 3 iPhone App in China, the No. 3 Nokia Symbian App, and the No. 15 Android app. The company has said it plans to expand its mobile offerings over the next year – particularly for the iPhone, iPad and Android. That should help as the mobile Internet market in China dwarfs that of the U.S. with more than 277 million mobile Internet users accessing the web behind the Great Firewall in 2009.

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3 reasons to invest in the 360Buy.com IPO (Jingdong Mall)

In what’s shaping up to be the largest U.S. Internet IPO since Google, Inc. (NASDAQ:GOOG), the Amazon of China, Jingdong Mall has announced plans to go public. Jingdong publishes 360Buy.com, the 120th most-visited Web site in the world. That’s a far cry from Amazon.com (NASDAQ:AMZN), which is ranked by stats-tracking company Alexa.com as the 15th most-visited Web site in the world. 360Buy’s got momentum on its side, though, and that makes me bullish on the stock. Here are three reasons you should consider investing in 360Buy.com when the company IPOs next year:

1) Growth potential. China’s internet population (at 485 million+) exceeds the entire population of the U.S., and that number is expected to triple to 1.5 billion by 2015. That will make the leading e-commerce site in Asia an international powerhouse. Amazon.com currently gets 6.8 times as much traffic as 360Buy.com. But I wouldn’t be surprised to see 360Buy.com overtake Amazon. Not only will the China’s internet population dwarf that of the United States, but the country’s still in the early stages of e-commerce adoption. Last year, online sales in China rose 77 percent (per FT.com).

2) Not to be confused with Taobao.com. Taobao may get significantly more traffic than 360Buy.com, but it’s important to note that they have different business models. Taobao’s a consumer-to-consumer e-commerce site that’s more akin to eBay than Amazon. While eBay garnered more traffic than Amazon in the early years of the Web, that trend has since reversed itself. Expect the same pattern to unfold in China as consumers turn to the Web not just for hard-to-find items and collectibles but for everything from jackets to diapers and laptops (all of which 360Buy.com offers).

JingDong is, indisputably, the largest business-to-consumer e-commerce site. And it’s purest competition comes in the form of E-Commerce China Dangdang, Inc. (NYSE:DANG). DangDang, which IPO’d to much fanfare in December, has since lost nearly 75 percent of its share price amid a rash of accounting scandals at several Chinese firms.

3) Revenue giant. Revenue at 360Buy.com is expected to hit $4.4 billion in 2011 (per RenaissanceCapital). That’s not much when compared with Amazon’s $40 billion, but it blows away DangDang.com, which will likely do somewhere in the neighborhood of $400 million.

Already, 360Buy.com processes some 300,000 orders per day from 25 million registered users. If the site can maintain its handhold at the top of China’s retail market, it should reward investors nicely in the years to come.

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How to invest in internet stock IPOs

One of the easiest ways to identify hot stock sectors is by following the release of new ETFs and ETNs. Last week, the Internet stock IPO market got its first two ETNs. The ETRACS Internet IPO ETN (NYSE:EIPO) tracks a UBS index of 20 tech-related stocks that have debuted on the NASDAQ or NYSE within the past three years. That includes headliners like professional social networking company Linkedin Corporation (NYSE:LNKD) and Russian search giant Yandex (NASDAQ:YNDX).

A sister ETN – the Monthly 2X Leveraged ETRACS Internet IPO ETN (NYSE:EIPL) – ratchets up the stakes even more by seeking to return twice the performance of UBS’ new tech index.

The funds give investors exposure to new tech stocks without forcing them to put all their eggs in a single company. That could prove appealing as many of the hottest tech IPOs have come from companies based outside of the U.S. Unstable political environments and intense competition in China and Russia, for instance, makes sinking cash into a single company risky.

three-reasons-to-invest-in-eipl-or-eipo

Here’s a look at the Top 10 stocks in the UBS Internet IPO Index. The index, which the new tech IPO ETNs will attempt to track, reads like a who’s who of the hottest tech IPOs over the past three years:

No. Company Ticker Weighting
1) LinkedIn Corp. LNKD 10%
2) HomeAway Inc. AWAY 10%
3) Yandex YNDX 10%
4) Rackspace Hosting RAX 10%
5) Pandora Media P 9.57%
6) RenRen RENN 9.2%
7) OpenTable OPEN 6.48%
8) Ancestry.com ACOM 5.97%
9) SouFun Holdings SFUN 3.44%
10) Demand Media DMD 3.39%

Yandex IPO: 3 MORE reasons to invest in the ‘Google of Russia’

I’d recommend waiting until volatility dies down after Yandex’s first few days of trading, but I’m convinced the long-term prospects for the company look good – at least as long as the political situation in Russia remains stable.

Late last month, I laid out 5 reasons to invest in Yandex stock, and now that Yandex’s IPO date (NASDAQ:YNDX) is upon us and shares are set to start trading today (on May 24, 2011), I’d like to offer a few more bullish arguments for the “Google of Russia.” Here are three MORE reasons to invest in the Yandex IPO:

1) More than Russia. Yandex dominates the Russian search market, but the search engine’s actually headquartered in The Netherlands. Yandex also operates in Ukraine, Kazakhstan and Belarus, and the company has an English-language version of its search engine (Yandex.com) in alpha testing right now.

While Yandex.com is nowhere near as fast or comprehensive as Google, it does have some interesting features. For example, when browsing through search results, you can hold down the CTRL key and hit the left or right arrows on your keyboard to move to the next or previous page of search results (just make sure your cursor isn’t in the search box to activate the function).

Currently, the Ukrainian version of Yandex (Yandex.ua) is the sixth most-visited site in the Ukraine, the fourth most-visited site in Kazakhstan (Yandex.kz) and the fifth most-visited site in Belarus (Yandex.by), according to stats from Alexa.com.

2) The Wild Wild Web. Just 43 percent of Russians currently have Internet access, per InternetWorldStats. Compare that with the more mature Internet market in the U.S. where 77 percent of the country has Web access.

To reach the maturity of the U.S. market, web access in Russia will need to rise nearly 80 percent in the coming years. That would exponentially drive up the number of pageviews served up by Yandex and increase the site’s advertiser base. Last quarter, Yandex served ads for 127,000 advertisers in Russia. That’s up more than 35 percent year-over-year, according IPO documents the company filed with the SEC.

3) Buyout by Google? One of the more interesting arguments for Yandex shares is that the company could be a potential acquisition target. Yandex owns more than 65 percent of the search market in Russia while Google controls just 20 percent of Runet searches. Russia’s booming online ad growth could bolster Google’s bottom line for years to come.

“If I were Google and looking to grow my Russian presence, that would be one of the options,” Uralsib analyst Konstantin Chernyshev told Reuters last week. If any company has deep enough pockets and a strong enough interest in acquiring Yandex, it would be Google (the same company that acquired social search engine Aardvark last year, and dropped $3.1 billion to buyout online advertising company DoubleClick in 2007).

If nothing else, we can take solace in the fact that Yandex is actually profitable. The company earned $134 million last year on revenue of $440 million. That fact alone gives it a boost over other high-profile tech IPOs like LinkedIn, which is forecasting a net loss in 2011. Tech may indeed be in another bubble, but companies like Yandex should be able to weather the turmoil when the bubble pops. It’s all about the rubles, after all, and Yandex has proven it can pull them in.

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Tudou IPO: Is Tudou stock a buy?

Tudou IPO: Is Tudou stock a buy?

Despite some catty disagreements between Tudou Holdings’ CEO and his ex-wife, it appears the online video sharing site will soon IPO on U.S. stock exchanges.

The move has been delayed for several months for unspecified reasons even as rival site, Youku.com (NYSE:YOKU) enjoyed a spectacular IPO in December. YOKU shares have risen more than four times their IPO price of $12.80, and it will be interesting to see if investors greet Tudou shares with the same enthusiasm.

Traffic at the two online video sharing sites is nearly even. Alexa.com ranks Youku as the 10th-most-visited site in China, but Tudou’s not far behind in the No. 12 slot (as indicated by the red line below):

Source: Alexa.com

Still, there is no clear-cut winner in the market yet, and there probably won’t be anytime soon. The question is which company will differentiate itself first as China’s leading video site? Investors will get their chance to make their bets soon enough.

Tudou IPO: Key Facts and Figures

Profits? Not yet. Tudou lost $55 million last year, more than twice its loss in 2009. About a third of that loss was attributed to share-based compensation and “fees paid to third-party advertising agencies” (per the Wall Street Journal). Youku fared somewhat better with a 2010 net loss of $31.5 million. Throughout 2010, Tudou generated revenue of $43.3 million while Youku’s revenues were $59.6 million.

Ex-wife? That spat between Tudou CEO Gary Wang and his ex-wife could have serious implications for the company. Wang’s ex believes she’s entitled to half of his Tudou holdings. If that’s upheld in court, it could fundamentally shift the power structure for the company creating as much internal pressure as external pressure from rivals like Youku and Baidu’s (NASDAQ:BIDU) Qiyi.com. “Under PRC law and judicial practice, in principle, community property during marriage should be equally divided upon divorce, subject to any agreement reached by the divorced couple and other principles such as the impact on the continuous operation of the involved business,” Tudou writes in its recently-amended F1 filing.

The true “YouTube of China?” Youku relishes its nickname as the “YouTube of China,” but in fact both Tudou and Youku have diversified by offering pay-as-you-go, professionally produced content.

“Through building long-term partnerships with copyright holders and communicating with our media partners, Youku Premium is creating a whole new way for people to find and watch the content they want, when they want it,” Youku founder and CEO Victor Koo said in January.

Tudou has also branched out from user-generated video. Not only does the company license professionally-produced content for paying members, it also produces its own in-house premium content (including That Love Comes in November 2010 and last month’s debut of Utopia Office, which has been compared to the U.S. sci-fi show Fringe).

Still, user-generated content remains the heart and soul of the site with users uploading more than 40,000 video clips to Tudou last year. Total user registrations on the site climbed from 56.4 million in 2009 to 78.2 million by by the end of 2010.

Coming to a Chinese mobile near you. One of the brightest spots in Tudou’s business plan comes from a partnership with China Mobile – the PRC’s state-run mobile company that happens to operate the largest telecommunications network in the world. “We … began generating revenues in January 2010 from our mobile video services, which we provide primarily through a video channel with China Mobile, and we had an aggregate of approximately 15.8 million users with a total of approximately 27.7 million clip views in 2010,” Tudou writes.

China Mobile users can opt to pay a monthly subscription fee for the service. As the number of smartphones proliferates behind the Great Wall, expect mobile revenue to start contributing a lot more to Tudou’s bottom line. Still, it’s unclear how long it will take Tudou (or Youku for that matter) to start generating profits. In the meantime, a lot of investors seem to have their fingers crossed hoping for the best.

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5 reasons NOT to invest in the RenRen IPO

Let me preface this by saying I’ve drank the RenRen Kool-Aid. How could any self-respecting geek turn down the opportunity to invest in the first major U.S. IPO for a social networking stock – especially one that’s being dubbed “the Facebook of China”? Still, there are warning signs that warrant being pointed out (even if you ultimately decide to ignore them in what will probably be a feeding frenzy on IPO day):

1) Competition. As it stands now, Facebook.com is blocked by the Chinese government. Rumors are running rampant that a partnership with Baidu.com, Inc. (NASDAQ:BIDU) – China’s largest search engine – is imminent, though. That could be bad news for RenRen. Who needs a Facebook clone, after all, when you can get the real thing? That said, I’m still not sure Facebook’s willing to turn information on its users over to the Chinese government – particularly if those users end up “disappearing” a few days later. Even if Facebook does decide to move ahead, it won’t happen overnight.

2) How many users do we have? One of the more puzzling pieces of the RenRen IPO is trying to figure out how many people use the site. RenRen itself can’t seem to spit out an accurate number. On April 15, the company claimed monthly uniques grew 29 percent (up 7 million users) during Q1 2011, per the Daily Times. Then, on April 27, RenRen back-tracked saying that monthly uniques were actually up just 19 percent (or 5 million users) during Q1. Weird…

All told, RenRen claims to have 117 million activated users as of March 31, 2011. Sources outside the company including Beijing’s Analysys International had previously reported the site has as many as 160 million registered users. I guess estimates will have to suffice.

3) Accounting abnormalities. “Prior to this offering, we have been a private company with limited accounting personnel and other resources for addressing our internal control over financial reporting,” RenRen writes in its F-1 filing with the SEC. An independent review of the company’s accounting procedures turned up “one material weakness and one significant deficiency.” Namely, the company has “insufficient accounting personnel with appropriate U.S. GAAP knowledge,” no stated plan for investing cash surpluses, and poor management of “treasury functions.” That makes RenRen the sort of company that embezzlers and fraudsters love. And fraudsters aren’t in short supply in China (take, for example, the recent news that the CEO of China’s Puda Coal secretly sold the company and forgot to mention that fact to shareholders).

4) PengYou. Ultimately, RenRen’s biggest competitor might not be Facebook, but rather a homegrown rival in PengYou.com. Two weeks ago, analysts at Goldman Sachs went on the record proclaiming PengYou will “become the dominant social network in China by leveraging (Tencent’s) much larger QQ community and more developed platforms.” Although PengYou launched just five months ago, it’s already the 26th most-visited site in China (check out my post RenRen IPO’s biggest hurdle might be PengYou for more).

5) What are ethics? When RenRen first launched in 2005 as XiaoNei.com, the company labeled itself a “Mark Zuckerberg production.” Zuckerberg, the CEO of Facebook, had nothing to do with the site, of course, but that didn’t really matter to RenRen’s founders. They just made a copy of Facebook and pushed it live. RenRen has something of a reputation for stealing ideas. When Kaixin001.com launched a social networking site in China, RenRen copied it (all the way down to the color scheme) and launched the doppelganger on Kaixin.com. Kaixin001.com eventually won a lawsuit against RenRen, but you can still type in Kaixin.com and get re-directed to RenRen.com. Maybe nice guys do finish last, after all.

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