Kicking the Tires on GoPro

For the past year and a half, the financial blogosphere has been inundated with posts touting the pros and cons of GoPro (GPRO). There's never been too much of an argument as to the quality of their high definition camcorders - very popular with millennial daredevils and outdoor enthusiasts. However, the perception that GoPro is more than a one-trick pony was greatly distorted in its first few months as a public company which caused it to accelerate to the upside.

Originally, traders bid the stock up with the expectation GoPro would build a media company with original content created with GoPro camcorders. You probably remember the catch phrase "content is king" back in the late 90's. Unfortunately, it couldn't supplant the 800 pound gorilla in the space, Alphabet's (GOOG) YouTube. Although GoPro has a very successful channel on YouTube, it doesn't generate enough revenues to command the lofty valuation it once did.

The stock got as high as $100 during its first few months of trading, only to come crashing down to $28, roughly $4 above the IPO price of $24. Almost a round trip ticket.

Examine the chart below:

Source: Stock Charts

The extreme decline in share value may be a tantalizing entry point for some investors, especially if they're familiar with GoPro's products. However, there's a 30% short float on the equity, so many traders believe the stock has more room to go to the downside.

I've read arguments that there is potential for quick profits for GoPro bulls with the advent of a short squeeze, and this may be true, but not at this juncture in my opinion. I tend to side with the shorts and think that although there is a future for this company, whether as a stand alone entity or part of a larger conglomerate, the next quarter will be tepid. The next earnings call is scheduled for October 28th, and I'm waiting for company results at this time before I put any money to work, if at all.

Short Term Bear Thesis

• High Definition semiconductor manufacturer Ambarella (AMBA) warned that Q3 would be flat in their last conference call. Ambarella is GoPro's primary chip supplier. Although this news caused GoPro to sell off significantly, the damage may not be done.
• No wide moat. Although GoPro has great brand recognition in the United States and is doing well internationally, in China it's rival Xiaomi that may have a leg up. Not only are Xiaomi camcorders significantly less expensive than GoPro's products, but there's that old adage "charity begins at home". There's no guarantee GoPro's Hero series of action cameras will supplant Xiaomi products in Asia.
• Oversaturation. GoPro has been around for years. Those that want the cameras probably already own them. Although they make for great stocking stuffers, that's a Q4 phenomenon.
• Smartphone cameras are improving. Although you don't want to take your iPhone or Android device scuba diving, the quality of still and motion pictures on smartphones is improving which may temper sales to mainstream buyers. As an example, the recently released Session model aimed at mainstream users was met with tepid reception, resulting in GoPro reducing the price by $100.
• Government regulation. Quadcopter is GoPro's foray into the drone market, and is scheduled to be released in the first half of 2016. Wall Street is a forward looking mechanism and potential sales of Quadcopter may be buoying current share price of $28. I think the drone market will be regulated in the near term, and may put pressure on sales, which in turn will decrease earnings.
• Virtual reality is an evolution, not a revolution. Odyssey, GoPro's 16 camera array that captures action in 360 degrees will surely be a hit, but not until VR technology becomes more suitable for the mass market. As is, we're still in the pioneering phase of VR rollout. Odyssey will not contribute meaningfully to the top or bottom lines for a few years.
• Analyst downgrades. Piper Jaffray recently cut GoPro's price target from $54 to $25. More brokerage firms may follow suit as the company's financial niche transitions from entertainment entity to hardware manufacturer. Valuation metrics should be in the same ballpark as a Garmin (GRMN) or an Apple (AAPL).

Long Term Bull Thesis

• Quality. GoPro cameras are the best products on the market. The editing software is improving, too.
• Brand recognition. GoPro cameras are synonymous with "must have" with the Millennials. This is true both domestically and in Europe. If they command a certain cachet in Asia, this could propel revenues to the upside.
• Expanding markets. If drone technology doesn't get regulated to extreme levels, and Virtual Reality becomes more user friendly, GoPro will have additional revenue streams to build on.
• Great distribution. Over 40,000 retail outlets sell GoPro camera. If you want to buy one, there shouldn't be a problem.
• Well run company. GoPro is profitable and has very little debt.

Valuation

The sentiment on Wall Street has soured on GoPro because it is no longer considered a media company. Analysts are valuing it as a hardware stock now. Let's compare some statistics between GoPro and Apple, another hardware company and see how it stacks up.

	GoPro	Apple
Price/Sales	2.23	2.84
Price/Book	4.84	5.08
Return on Equity	41.58%	41.15%
Estimated earnings growth this year	28.80%	41.60%
Trailing P/E	25.53	12.84
Estimated earnings growth next year	15.30%	7.30%
Forward P/E	14.55	11.33
Dividend	0%	1.86%

Source: Yahoo! Finance

The two stocks appear to be evenly matched in Price/Sales, Price/Book and Return on Equity. It's when we get to earnings growth and forward P/E Ratios that GoPro seems to be slightly overvalued compared to Apple. Plus, Apple pays a healthy dividend for a Silicon Valley corporation. I believe Q3 will be a tough one for GoPro, and analyst estimates may come down, especially impacting the forward P/E Ratio.

Strategy

I'm a value investor by principal and prefer to purchase my stocks at discounted rates. GoPro doesn't meet that criteria yet. All bets will be off if they report a killer quarter on October 28th, but I'm positioning my bid as a price in the low $20 range, below the original IPO price of $24. I will not chase a stock like GoPro. If I do happen to catch my price, I wouldn't hold my position much past Q4 which is traditionally a strong quarter because of the holidays.

A Clear Plan of Attack

The current market correction we're experiencing has carpet bombed some high flying stocks into submission. Alibaba (BABA), Tableau Software (DATA), and Twitter (TWTR) were all shown the door by short-term investors exiting their positions. Selling pressure has reduced equity valuations to levels that haven't been seen in months, and in some cases years. Although I've done a complete reboot with my investing thesis during the last two years by primarily buying index ETFs, I still dabble in individual equities on a limited basis. Enclosed is my current take on these three securities.

Tableau Software

Tableau Software still remains a category killer. It traded at $131 at the end of July, only to come tumbling down to $82 as of Friday. I got off the sidelines and picked up some shares, although I didn't back up the truck because my belief is that it's much more prudent to be in index funds at this juncture. Nevertheless, I wanted to own a limited number of shares to become an investor in a exciting young company. I thought $82 was a good price for a solid growth company.

My last posting gives you the lowdown on where the company stands, but here's the synopsis - It was a momentum stock for most of 2015, only to be sold off after a very solid quarter because Wall Street deemed the valuation too high. Tableau dropped roughly $50 in 45 days. Some of the depreciation is due to the quarter, some to the overall market correction, and some because on Thursday rival Oracle (ORCL) reported a slowdown in revenues. This, coupled with The Street reconfirming their SELL rating on Tableau citing better valuations among its peers, caused it to drop $6 in one day last week.

This SELL rating by The Street is short sighted in my opinion. Tableau is the proven technology leader in data visualization organizations, whether it's a pure-play, or part of a conglomerate like Oracle. It deserves a premium multiple. Granted, Tableau's technology can be leapfrogged in a heartbeat, but they've maintained pole position for years, and invest heavily in R&D. My bet is that the market sell-off we're experiencing is just a run-of-the-mill correction, and that Tableau accelerates to the upside after the next conference call. It may not become a go-go stock again, but it has the potential to beat the S&P 500 for the next few years.

Twitter

Last week Twitter CFO Anthony Noto made a presentation at the Deutsche Bank 2015 Technology Brokers Conference. Mr. Noto is a candidate for the vacant CEO position, which is now in a state of flux. Company co-founder Jack Dorsey is Twitter's interim CEO and is also in contention for the top spot. The board has yet to make its decision on who will be calling the shots, and Noto declined to make any comments on the CEO process during the presentation. A lack of a permanent leader has been cited as one of the reasons the stock is under considerable pressure.

Another reason for the equity sell-off is that the product is difficult to use, which in turn decreases the number of monthly active users [MAU]. Mr. Noto addressed this concern and went into detail about Project Lightning, an initiative by the company that is set to launch this Fall. In a nutshell, Project Lightning will curate Twitter content to make Twitter simpler and easier to use. The organization is going to make a big media blitz through television advertising and digital video, to make the mass market aware of the product change.

My belief is that once the market correction is over, the results of the Project Lightning are in, and the CEO is in place, Twitter will make considerable gains. I've written about the stock numerous times, and thought it was expensive. However, I had a limit order in for $25, and during the recent "flash crash" picked up some shares at $23. I really enjoy using the product, and believe the stock will do well after it gets through the near-term growing pains. This is an investment for me, not a trade, albeit a very small investment.

Alibaba

Most people that follow business news are well aware of the pissing match between Barron's and Alibaba last week. It started with Barron's doing a cover story about the Chinese e-commerce company with a preposterous claim that the stock could fall 50%. This is after a fall from $120 to $65. Alibaba shot back with a rebuttal, stating the article was filled with fallacies. It is difficult to know if any company is a house of cards, but if Alibaba is, it would mean the biggest stock collapse since Enron. I give Alibaba the benefit of the doubt, but must play Devil's Advocate because it is a Chinese company which tend to lack transparency.

Like Twitter, Alibaba also presented at the Deutsche Bank 2015 Technology Brokers Conference last week. Executive Vice Chairman Joseph Tsai made the presentation, but didn't shed much more light on the company then what was already given on the last conference call. He did state that there has been a slowdown in the overall Chinese economy since mid Summer, a psychological effect from the stock market crash in China. White-goods such as washing machines and refrigerators remain steady, but the lower end consumer goods have slowed down. He also discussed logistics, and how "the last mile" isn't as developed in his country as opposed to Europe or the United States. This means there's plenty of room for improvement by Alibaba partners engaged in he transport of goods sold.

Alibaba's stock was priced at $68 for its IPO a year ago. It now trades at $65. A lot of smart people in the investment banking business priced it at $65 for a reason - the underlying business fundamentals. That said, although business is improving for Alibaba, the economy is slowing in the People's Republic of China. That, coupled with a large share lock-up expiration that come to fruition on Monday, make me want to take a wait and see on this equity. I don't believe the stock will be cut in half as Barron's suggests, but if it drops $10, to $55, I would consider taking a flier on it for Asian exposure to my portfolio.

Resistance is Futile: Artificial Intelligence Invades the Markets

Black Monday was Monday, October 19, 1987, when the DOW fell 22.61% in one trading session. Illiquidity and investor psychology have been cited as possible factors for the sell-off, but the brunt of the implosion can be traced to Quant Funds that do all of the program trading. We now have circuit breakers and other mechanisms in place on the major exchanges to prevent another catastrophe, or so this is what we're told. Fast-forward to late August 2015, and the DOW drops almost 1,100 points at the open for no apparent reason other than rogue algorithms. Things could have gotten out of hand.

Omega Advisors Chairman Leon Cooperman, a vocal self-made billionaire, is often on CNBC, and he cites the proliferation of risk-parity funds as the culprit of our recent "flash crash". To use a simplistic definition, risk-parity is an investing strategy some quant funds use to limit risk by over-allocating lower volatility assets. This investing technique usually has a heavy dose of bonds over equities, and is supposed to protect investors such as pension funds in all investing environments. In theory, if stocks sell off, you make money with the bonds, and visa versa.

The problem is that both stocks and bonds are not supposed to depreciate at the same time. Enter the new "flash crash" where both stocks and bonds took a beating. A recent Reuters article gives you more depth about risk-parity funds and the possibility that they did do damage to the overall markets three weeks ago. Mr. Cooperman took exception to funds like this in a CNBC interview because they cause instability in the indexes, plus alter conventional investing tactics:

"In the world I grew up in, and the world Warren Buffett grew up in, when something went down you wanted to own more, and in the world that we're in now, it goes up you want to own more, and it goes down you want to own less, and that's just counter-intuitive. It lacks common sense."

He's absolutely right that it doesn't make sense. You've probably heard stock pickers use the expression, "It's a market of stocks, not a stock market.". That's a dead chestnut in today's era of programmatic portfolio allocations. An old stock picker like Cooperman said it almost correctly:

"I think the machines seem to be taking over."

The machines don't seem to be taking over, they have taken over. That's why it's much more advantageous for individual investors to be in S&P 500 index funds such as SPDR S&P 500 ETF Trust (SPY), iShares S&P 500 Index (IVV), or, Vanguard 500 Index Fund (VOO). Any one will do. This is especially true if you are a domestic investor. It's like John Henry versus the steam drill. John Henry and his hammer won, but only to die at the end of the competition from exhaustion. It's much better to be on the mechanized side of the fight at this juncture. Yes, you can still pick winning individual securities, but what's the probability you'll do it consistently when competing against computers.

The Reuters article cites that the world's largest hedge fund Bridgewater Associates, allegedly lost 4.2% in August. Bridgewater's 'All Weather Fund' is an algorithmic trading vehicle, a risk-parity fund. It's supposed to make money during market sell-offs. Because you need to be a high roller to invest in hedge funds, it's the one percenters that lost money during August investing in Bridgewater's fund. Nevertheless, it's Main Street investors, either through pensions, 401K plans or individual broker accounts, that probably saw shades of the 'Great Recession' of 2008-2009 flash before their eyes due to market instability. It was the lead story on the evening news for a week.

Bridgewater Associates has $165 billion in assets under management, and this is miniscule compared to the net worth of the trillions of dollars invested in the overall markets. I doubt they were the lone wolf that caused such a big market meltdown in the most recent 'flash crash', but they could have contributed to it. However, they were asleep at the wheel during August with their proprietary trading algorithms, which presumably were being monitored and adjusted by a team of human beings. What's going to happen when the machines take over, and all trading is guided by artificial intelligence? The future is closer than you think.

"I'd rather be a hammer than a nail"

High finance is quickly morphing into a machine learning world along with the rest of corporate America. Bridgewater Associates recently formed a new artificial intelligence division spearheaded by David Ferrucci, the mastermind behind the IBM and academic engineers that created the Watson computer system. According to an article by Phoebe Venable:

"The AI unit will devise trading algorithms that make market predictions based upon historical data and statistical probabilities — and like all AI systems, it will adapt to new information and get smarter as it goes."

Warren Buffett also likes to say, "If past history was all there was to the game, the richest people would be librarians.". However, Bridgewater isn't alone in its pursuit of unlimited profits by utilizing machine learning. A blog posting by Robust Tech House lists most of the major players venturing into the new era of AI, plus a brief synopsis of their business models. The firms included are:

• Two Sigma Investments
• Bridgewater Associates
• Clonealgo
• Renaissance Technologies
• Aidyia
• Cerebellum Capital
• Rebellion Research
• Commeq
• Castilium
• Binatix
• Sinai
• KLF Capital

If you have plenty of cash to burn, a closer examination of these organizations will give you a nonstop flood of ideas where to invest if you are inclined to go with machine learning algos. The prevailing orthodoxies on Wall Street would tell you to put your money in firms like these. However, I don't know which ones are flush with cash, or which ones are skating on thin ice. With the exception of companies such as Bridgewater Associates, most hedge funds have short self lives, automated or not.

Aidyia, one of the AI Funds listed above, is thoroughly covered in Quartz by Georgia McCafferty. As she states in her posting about the future of finance:

"Most quantitative trading, as it is currently practiced, relies on a human being to develop a mathematical model to identify trading opportunities. The model is then updated by hand to adapt to new markets or changing conditions. For an AI, conversely, humans develops the initial software, but the AI itself develops the model and changes it over time."

Just like the Bridgewater algo. What I find disturbing is that if the people monitoring Bridgewater's 'All Weather Fund' can't keep from losing money in a "heads I win, tails you lose" environment, what's an algorithm going to do if they aren't programmed correctly? This could put a lot of pressure on the markets and cause a collapse. It almost happened three weeks ago with human interaction. What about on autopilot?

I'm not a Luddite, but am wary of the new era. With the proliferation of personal computers and smartphones, the age of privacy is over. This becomes more evident when you mix machine learning with cloud computing. Artificial Intelligence in all forms is here to stay, especially in finance. It's a leading edge business where technology is concerned. There has to be some government intervention to monitor automated hedge funds or else they're doomed to crash the markets.

Splunk: In No Man's Land

"Big Data is a broad term for data sets so large or complex that traditional data processing applications are inadequate." - From Wikipedia.

If you're in the corporate world, the concept of Big Data is nothing new. Even Main Street is aware of phenomenon, if not by name, then by practice. One example is Sabermetrics, the advanced baseball analytics made popular by the book Moneyball by Michael Lewis, and made even more popular by the movie of the same name starring Brad Pitt. Another is Amazon (AMZN) recommendations. The more you shop, the more they know about you. That's Big Data at work.

Although this mining and massaging of data is here to stay, Big Data as we know it is morphing from static sources to continuous data streams of spontaneous creation. This actionable data is created by HVAC controllers, smart electrical meters, GPS devices, RFID tags, smartphones and electronic wearables like a FitBit. We are now entering into the era of telemetry, the automated communications process by which measurements are made, and other data collected at remote points, then transmitted to receiving equipment for monitoring. This is where Splunk (SPLK) comes into play.

I did a posting about Splunk in early 2014 when it was the flavor of the month along with its entire sector of data mining and analytics securities. For a more detailed look into Splunk's business model, you can find my previous article here. At the time, I thought the equity was overvalued, and still do by a price/sales metric, but valuations have come down significantly in a year and a half.

Source: Stock Charts

If you examine the above chart, you can see where the stock was extremely overvalued. Stair step pattern on the way up. Elevator on the way down - penthouse to lobby in a matter of a month. However, if you are a long-term investor and bought at the IPO price of about $25 three yeas ago, you doubled your money. That beats the market. I don't want to go over old material from my last posting about Splunk, so I will concentrate on two areas of interest the company has been expanding the past 18 months, Security and Cloud.

Security

Every digital action produces actionable data, and Splunk's predictive analytics puts them at the forefront of Internet security for both corporations and The United States Government. According to CFO David Conte in the most recent conference call:

Security two plus years ago was 20% to 25% of business, and the end of last year, it ended up being not quite 50%, but over 40%.

With so much of the company's revenues devoted to security, I was surprised it didn't get caught in the updraft during the past year of many cyber security equities like partner Palo Alto Networks (PANW), which has had an incredible run, and to a lesser degree the PureFunds ISE Cyber Security ETF (HACK). That hasn't been the case. Perhaps investor sentiment will change once the market gets back in gear because of two recent acquisitions.

The first acquisition is Metafor Software, an anomaly detection and machine learning company. Splunk plans to fold in Metafor's technology into their already existing platform. The second purchase is Caspida, which adds Behavioral Analytics and machine learning to better detect advanced threats and malicious insider penetration. The software uncovers hidden breaches and new attacks out-of-the-box without extensive customization. Splunk will offer this product as a standalone application and bundle it in with their existing product line.

In the last conference call, company chief Godfrey Sullivan commented that security has become the main conduit to gain access into the inner workings of IT departments. For the first time security is serving as a steward for a lot of machine data across an organization. Splunk's sales department now targets security departments of potential clients, then expands across to application development or IT operations. Four years ago, it was the other way around, you'd go through IT operations to get to security. Splunk is the nerve center of security as one executive stated.

Cloud

Another initiative Splunk has recently launched to increase its Total Addressable Market [TAM] is its cloud service. Splunk cloud is now available through nine Amazon Web Services global regions. The results from the international launch look promising, and in the past nine months, clients have tripled their orders. According to a Splunk executive:

Our customers are excited with the speed and ease of Splunk cloud. They are happy to focus their time and attention on analyzing data to achieve their business results rather than procuring and deploying equipment.

Company management also believes they have the only solution in the marketplace that gives clients a true hybrid experience. They can search seamlessly across data stored on premises and in the cloud to get a unified experience with a single Splunk interface. One example is The City of Los Angeles who purchased Splunk cloud and the application for enterprise security to correlate cyber threat information with several other governments. This solution allows Los Angeles to monitor and analyze network traffic to identify discrepancies that indicate malicious attacks.

Offering a cloud or software-as-a-service solution is the way that many enterprise software companies are transitioning. It enables you to reach smaller customers with an out-of-the-box solution, plus takes away implementation headaches for IT departments in larger organizations. However, corporations like Adobe (ADBE) and Nuance (NUAN) made the switch, and found that it put pressure on equity valuations for a number of years. Although Splunk is in the early stages with its cloud offering, it's something potential investors should be aware of.

Some Statistics

Some pertinent points addressed in the conference call:

• Revenues were up 46% over the past year.
• The company can claim 10,000 customers worldwide. Including 79 of the Fortune 100 companies.
• Since they denominate revenue globally in U.S. dollars, they do not have foreign exchange exposure.
• Splunk expects to be profitable on a non-GAAP basis for the balance of the year.

Valuation

When I wrote my initial post about Splunk, trailing twelve month price/sales was 32 with a market cap of 9.8 billion dollars. Now it's much more reasonable with a price/sales of 14 and a market cap of 7.56 billion dollars. Still expensive. This can be reflected by the short float of roughly 11% as of two weeks ago. In addition, after a well executed quarter as reported on August 27th, the stock price went down. I realize there is no cookie cutter answer as to when the current overall stock market correction will be over, but it's taking all the growth with no earnings equities down, Splunk included.

Splunk excels at telemetric data collection with machine-to-machine data mining and analytics. This sounds like science fiction and that's why I like the company. They're using 21st Century technology in a 21st Century world. If you are considering investing in Splunk in anticipation of it regaining its go-go days of two years ago, I believe you will be disappointed. However, if you want a high growth company that appears to be turning profitable, this may be the right stock for you if you temper your expectations on price performance.

Liking a company and liking a stock price are two separate situations. I am not alone in my conclusion. A Barron's assessment of the conference call echoes my beliefs, or perhaps I'm parroting Wall Street consensus. As far as equities go, Splunk reminds me a lot of Acme Packet, a security that was engulfed by Oracle (ORCL) many years ago. Both pure-play companies had big runs, then crashed, although their respective technologies were deemed superior. I don't know what's in store for Splunk, but they'll probably be around for a long time unless a company like IBM has a better idea.

Be Careful What You Wish For

Back in the 1990's, Legg Mason's Bill Miller was synonymous with investing excellence. He ran the Legg Mason Value Trust mutual fund, and his after-fee returns beat the S&P 500 index for 15 consecutive years from 1991 through 2005. He was often mentioned in the same breath as Warren Buffett where money making prowess is concerned. Miller's investing style was utilizing a concentrated portfolio which was in vogue at the time, and he made outsized bets on young technology companies like America Online. You can't argue with his success.

Back when Bill Miller was front page news, I distinctly remember an interview with him, and he was asked what books he was reading to compliment his investing process. He replied he was very much influenced by horse handicapping and betting books. This was before the advent of High Frequency Trading and the proliferation of Quant Funds that are popular in today's investing world. I don't know what Mr. Miller's investing style or track record is in the environment of proprietary trading algorithms, but he may have changed with the times.

Last week I read a book, Smart Sports Betting by Matt Rudinitsky that stated the sports betting market is very much like the stock market. Below are quotes by the author on the parallels of the two, plus my own commentary:

• It incorporates everything that is public knowledge. (Just like the Web bots that scour the Internet for press releases that report investing information such as earnings statistics. By the time the retail investor gets wind of the information, deep-pocket investors have already taken advantage of the price/action.)
• It incorporates the thoughts of all professional bettors, because their money has flown into the market and given oddsmakers information on who they like. (Sounds a lot like the options market. Industry insiders know where the hot money is flowing.)
• It incorporates the thoughts of many ridiculously complicated algorithms that professional bettors have backed up with lots of money. (This parallels with quant hedge funds.)

Statements like this are why I have almost given up investing in individual securities, and have migrated to passive investing in index funds like iShares Core S&P 500 (IVV). All is known...except when you get a flash crash like we did on Monday when the DOW dropped close to 1,100 points at the open. Although we've regained a lot of those losses after a two day rally, the sensory overloading drop spooked both retail and institutional investors.

We haven't experienced a flash crash, or whatever you want to call it, in five years. With the high frequency trading networks and quant funds commandeering the exchanges, selling begets more selling. A vicious cycle as trading triggers kicked in as each technical level was breached. If you didn't have limit orders in place before the market opened on Monday, you were out of luck for a brief period of time. Many brokerage houses shut down for the first fifteen minutes of trading from the overwhelming volume and price depreciation in both equities and ETF's. You would not have ben able to log into your brokerage accounts in some instances.

One piece of carnage on Monday was the drop in the iShares Core S&P 500 ETF, which was down almost 25% in the first few minutes of trading. This did not correlate with the overall decrease in the S&P 500. The decrease in the iShares Core S&P 500 ETF was much more severe. Although the price/action balanced out after about ten minutes, if you sold your shares at market price, you got fleeced. Although high frequency trading makes the markets much more liquid, it is times like these that it is important to always use limit orders.

Nobody really knows what caused the violent sell-off, but speculation is that it was the implosion of the Chinese markets, and the continuing decrease in the price of oil. An infusion of cash by the People's Republic of China in their native exchanges, and a short squeeze in oil have helped boost the overall indexes the past two days. In fact, at this juncture, we're up for the week, but down 6% for the month.

My personal belief is that the correction is healthy for the markets. I had limit orders in and bought a stock and an index ETF early Monday morning - Twitter (TWTR) at $23 and the iShares Core S&P 500 ETF for $188.50. Financial guru Art Cashin who is often on CNBC, stated that historically, these sharp V shaped corrections rarely last. He didn't suggest we'd test the bottom, but that there would be some backing and filling in the next two weeks. That, coupled with the fact September and October tend to be bearish months for the markets, propelled me to raise some cash to take advantage of securities at lower entry points. And yes, I will be using limit orders.

Alibaba Bulls Get Caught Flat-Footed

Last September, Alibaba Holdings (BABA) went public at $68/share, raising approximately $10 billion for the company before expenses. It was the biggest IPO in history. Investors thought it was an ATM stock, generating gain after gain by producing earnings that "beat the street" on a consistent basis based on past performance. For a few months, that was the case, at least on price appreciation when Alibaba reached $120 in November. However, since that time, it's been a slide straight down as it trades very close to the IPO offering. The road to nowhere.

Source: Stock Charts

This is a security that was on practically every conviction buy list from the Wall Street marketing machine. In fact, it still is, and even more so as the price loses steam each passing month. According to Yahoo!Finance, 16 brokers consider the equity a strong buy, 25 a buy, and only 4 a hold. It had almost the same recommendations three months ago when it was considerably higher.

Not everyone feels as positive about Alibaba as the sell-side analysts. Master of the Universe George Soros sold 98% of his holdings in Q2, leaving him with a meager 59,000 shares. Maybe this is a lesson for the retail investor to learn, that the majority of the time, IPO's should be left to the deep-pocket traders and hedge funds. The mom and pop investor usually gets fleeced by the time shares are available to the general public. Now we're back to square one, almost a year has passed, and the company is in transition. Let's see if you think this is a good place to park some money.

Some Background

Founded in 1999, Alibaba is the largest online and mobile commerce company in the world based on Gross Merchandise Volume [GMV]. GMV is generated from three marketplaces:

• Taobao: China's largest online shopping destination. It works a lot like Ebay. Alibaba provides the platform for merchants to set up digital storefronts, plus assists in logistics and payment processing.
• Tmall: China's largest third-party platform for brands and retailers. Some examples are American retailers like Costco and Macy's who are now setting up shop here for exposure in the People's Republic of China.
• Juhuasuan: China's most popular group buying marketplace.

Alibaba's companies have become synonymous with online and mobile shopping in China. As a result, the twelve months ended March 31st, 2015, these three marketplaces generated a combined GMV of $394 billion. There were 350 million active buyers and over 10 million active sellers at this time. In Internet time, a 16 year old organization is considered a fossil, but that can be good if execution is consistent. Let's look at some numbers provided by the most recent S&P Report:

	2012	2013	2014	2015
Revenues in millions	$3,131	$5,488	$8,579	$12,300
Earnings per ADS	$0.26	$0.57	$1.63	$1.57

As you can decipher, earnings per ADS have been lumpy on a year-to-year basis. However, with almost $400 billion GMV and growing, you can see why investors became excited at the chance to invest in such a solid company, especially when there is still a large untapped market in China. Although Q1 2016 wasn't bad, it wasn't up to Wall Street standards on the revenue front, which put additional pressure on the stock. Management took the foot off the gas in Q1 because of two transitions for Alibaba. One is the transition from desktop computing to mobile. The second is the overall transition of Alibaba from a platform to an Internet conglomerate much like Amazon (AMZN) or Google (GOOG).

Transitioning to Mobile

The overall consumer transition from desktop to mobile is a fairly old phenomenon now. It was only two years ago that Facebook (FB) shares were decimated because they didn't have a concrete mobile strategy, or at least this is what Wall Street thought. Alibaba's mobile strategy appears to be panning out, and this was a problem for the analysts because it decreased desktop growth. Alibaba management takes a different tack. They believe that both mobile and desktop are synergistic because the two platforms compliment each other. The company considers it a unified platform. Mobile users tend to visit Alibaba properties more frequently, but desktop users buy higher ticker items on a more "sticky" application.

In examining the last quarter more closely, mobile GMV reached $60 billion, an increase of 125% year-over-year. This accounted for 55% of total GMV transacted on Alibaba's marketplaces. The company expects mobile GMV as a percentage of total GMV to keep growing as they improve the user experience on their mobile apps. However, as a cautionary note, the company stated improvement in mobile monetization may not always be linear. Management also said that the strength in mobile commerce demonstrates Alibaba's ability to attract mobile users with strong commercial intent on a scale that is unrivaled by any peers in China, as well as globally.

Transitioning to a Technology Juggernaut

Rodney Dangerfield once said, "I found there was only one way to look thin: hang out with fat people.". This is exactly what Alibaba is doing, hanging with the fat technology giants like Amazon and Google. All three companies have expanded their core competencies to include other areas of interest that compliment their bread and butter technologies. For Amazon, it was morphing from an online upstart in e-commerce to cornering the market in cloud computing with Amazon Web Services. Google went from king of search to inventing the Android operating system, and developing robotics just to name a few areas of expertise. Now Alibaba has joined the fray with a big push into logistics and cloud computing.

In 2013, Alibaba formed a joint venture with Cainiao Logistics, taking a 48% equity interest in the operation. According to Alibaba, they have created the largest logistics ecosystem in China. Consumers now enjoy next-day delivery services in 41 major cities, including Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou, and this will be extended to 50 cities by the end of this year. Same-day delivery of groceries has also been launched in Beijing and Shanghai, taking a page right out of the Amazon playbook.

To buttress and expand Cainiao's logistics network, Alibaba recently formed a partnership with Suning, one of China's largest electronics and home appliance retailers. Now customers in over 150 cities will be able to enjoy two-hour delivery services. Alibaba has been handling approximately 30 million packages a day, 10 times the amount of their competitors, and those numbers just got larger with Suning in the fold. In addition, Suning has brick and mortal retail outlets to enable ease and efficiency in returning big ticket items.

Aliyun, Alibaba's cloud service, is the largest cloud computing business in China. Although the company has grand plans to take it global, I would think they would have difficulty going toe-to-toe with American counterparts such as Amazon Web Services and Microsoft's Azure. Nevertheless, after years of investment, Alibaba is beginning to see positive impact in reliable, cloud service offerings. In Q2, revenue growth from cloud services was 106% year-on-year, accelerating past the 82% growth in the prior quarter. Aliyun is one of the company's core growth strategies in the coming years.

Although Alibaba has its tentacles in many other businesses, according to the Q4 2015 conference call and the Q1 2016 conference call, logistics and cloud services are the areas the company is counting on to boost customer satisfaction and sales growth. However, make no doubt about it, Alibaba has plans to compete internationally with cross-border initiatives and other offerings. Exhibit A is Alipay, a service very similar to PayPal that accounts for about 78% of e-commerce transactions on the Alibaba platform.

Valuation

According to Yahoo! Finance, Price/Sales on a trailing twelve month basis is 14.5, which is high for a mature technology company. This is not an apples to apples comparison, but Amazon comes in at only 2.52, although doesn't produce earnings like Alibaba. In fact, Alibaba's earnings generation is a big selling point for investors. Wall Street is a forward looking mechanism, and we are already past Q1 of fiscal 2016 for the Chinese e-commerce behemoth. Earnings per ADS are projected to be $2.73 for the entire year. This would give us a P/E ratio of 25. Not overly exciting, but when you consider growth projections, the PEG Ratio looks much better. Next year, earnings growth is slated to come in at 27%, which would give us a PEG Ratio of just about one. That's in the wheelhouse of many traditional growth investors.

Caveats

One thing potential investors should not overlook is that Alibaba is a Chinese holding company registered in the Cayman Islands. I'm not suggesting they are going to fudge the numbers, any company has the potential to do that, but they may not have as much transparency as a domestic equity. They are also under the thumb of the People's Republic of China. Last quarter sales came up a bit short because Chinese authorities suspended Alibaba's on-line lottery. The government could interfere again in other areas.

For instance, in the 2015 Q4 conference call, an analyst brought up the point that the Ministry of Commerce recently proposed that all online merchants have to have their businesses registered and issued operating licenses. Alibaba management answered the question stating it was just a proposal, and that the government is encouraging entrepreneurs to modernize. However, Alibaba's Taobao Marketplace is a huge profit generator for the company, and any decrease in profits could place addition pressure on shares, albeit for a short period of time.

Finally, there is the issue of the September 19th share lockup expiration. Sixty three percent, or 1.58 billion ordinary shares may be flooding the market in about a month, if indeed the owners want to sell. Softbank, Yahoo!, company founder Jack Ma and Alibaba Executive Vice Chairman Joseph Tsai all have major stakes that could dilute company valuation metrics if they wish to liquidate. Not highly plausible, especially by company insiders, but could put a crimp in earnings per share if acted upon.

Conclusion

With the Chinese stock markets imploding, the Chinese economy contracting, global stock indexes like the DOW and S&P 500 correcting, there may be a better entry point in Alibaba. That said, this stock may be a good long-term investment for people looking for Asian exposure in their portfolios. Although Alibaba wants to expand globally, I believe that is a tall order, particularly with American rivals such as Google and Amazon which may be perceived to have the better technology. However, charity begins at home. There are over a billion people in China, and Alibaba has only 350 million monthly active customers. There's plenty of room for growth in the PRC, not to mention in the adjacent geographies in the Asia/Pacific region. I'd wait until after the lockup expiration before placing an order.

Tableau Software Takes a Standing Eight

The world has taken a few spins since "Big Data" visualization and analytics company Tableau Software (DATA) reported Q2, 2015 earnings results on July 29th. Although Tableau had an exceptional quarter, the stock failed to maintain orbit at $131/share, and has crashed to near par value at roughly $103 in the past two weeks. The primary reason for the decline is that traders bid the stock up to nosebleed valuations, and it couldn't maintain the upward trajectory based on Q2 sales and earnings.

Source: Stock Charts

I've talked ad nauseam about equities included in the Investor's Business Daily Top 50 List, and how they tend to crash and burn with even the slightest blemish in valuations in the quarter-to-quarter trading environment we're in. The recent price decline in Tableau just illustrates the point. The company graced the upper echelon of the IBD 50 until short-term traders opened the floodgates, and dumped whatever inventory they had on hand. Exhibit A is the right hand side of the above chart. The stock declined close to 20% in one day.

This is not a slight to the IBD 50. Far from it. We're currently in a market that pays up for growth, and holding periods are minimal on a historic basis. This trend will probably continue unless there is some sort of penalty for selling securities held less than a year, such as higher capital gains rates. It hasn't paid to be a value investor, or long-term investor in this market. Now with a shift of mind-set in Tableau as a short-term trade, I want to examine the last two conference calls closer to see if this could be a good buying point.

In March of 2014, I wrote my first post about Tableau. It was a hot IPO at the time, and I thought the equity was expensive, but was in a good position in regards to its technology. Since that posting, revenue valuations have been cut in half, and the company is now profitable, but it is still an expensive security. Trailing 12 month Price/Sales Ratio is currently 14. However, this hasn't stopped traders from piling on, driving the price higher. This may be attributed to impressive execution.

According to Investor's Business Daily:

"Tableau has beaten analyst estimates on earnings and revenue in each of the nine quarters for which it has filed reports since making its IPO in 2013. Revenue gains have been in the double-digit percentages."

In the investing environment we're in, a good growth stock can levitate for years. This is especially true when your computational efficiency is considered to be leading edge. Tableau's specialty of data visualization has been proclaimed pioneering by both company execs, and The Gartner Group. A ringing endorsement by The Gartner Group can go a long way in enterprise software sales. Company chief Christian Chabot noted in the 2015 Q1 Conference Call:

"Gartner is very influential, very well read. And particularly, in regions where we don't have a lot of brand recognition, it is one of our more important awareness vehicles and sources of lead flow."

If we examine some statistics from the past four years, you can see why Wall Street considers Tableau Software a top notch growth stock. Although earnings are minuscule and lumpy on a year-to-year basis, sales and a healthy R&D budget are accelerating. Some of the increase in sales may be from the inclusion in Gartner's Magic Quadrant three years running.

	2014	2013	2012	2011
Revenues (in thousands)	$412,616	$232,440	$127,733	$62,360
R&D (in thousands)	$110,923	$60,769	$33,065	$18,387
Net Income (in thousands)	$5,873	$7,076	$1,427	$3,379

If we extrapolate revenue statistics out to full year 2015, company guidance is for a range of $617 million to $627 million, up from the $600 million to $610 million from Q1. This represents an annual growth rate of approximately 52% at the high end of the range. It should be noted that Tableau, like the majority of enterprise software corporations, lands a considerable amount of large contracts at the end of the fourth quarter. Some of these sales will come from international markets, which now constitutes 25% of business. In fact, Tableau is opening a new Data Center in Paris to make further inroads in overseas opportunities.

Competition in the "Big Data" visualization niche remains fierce. Rivals such as Microsoft (MSFT), Oracle (ORCL) and IBM (IBM) have much larger coffers than Tableau, but Tableau believes they've built the better mousetrap with first mover advantage.

CEO Chabot proclaims:

"And while everyone else is saying they're kind of figuring it out and doing it, Tableau remains the gold standard, and that will remain our main source of competitive advantage."

To maintain that edge, for the past two years the company spent a great portion of its R&D efforts on Tableau's new iteration, Tableau 9.0. It was released in Q1 with version 9.1 currently distributed in beta. It's the company's biggest leap in its history from version to version on server scalability and resiliency. Its strengths versus the competition continue to be incredible ease of use, a pioneering approach to visual analytics, a self-service platform, and a product that is finely tuned with all the world's disparate data.

Tableau now has 32,000 customer accounts worldwide. The company's "Land and Expand" sales strategy is a grassroots endeavor that has paid off handsomely, in both revenues and word of mouth advertising. Once a client signs up for the service, the Tableau Software sales team helps customers upgrade and incorporate the Tableau solution into other departments within large businesses. In Q2, they signed 233 transactions greater than $100,000 as companies continue to deploy Tableau more broadly within their organizations. Q4 should be a barn burner, but that's almost six months away.

Former NFL coach Bill Parcells is known for saying, "You are what your record says you are.". At this moment, Tableau has been a great long-term investment, especially if you bought it at the IPO price of roughly $30/share. Conversely, it's been a not-so-good investment if you bought at the top, only to see traders go into damage-control after the Q2 conference call. I believe for the time being, the selling has been done.

However, the bull market that started in March 2009 is almost six and a half years old. In addition, we haven't had a 10% correction in the S&P 500 since last October (intra-day, the correction was 9.8%). Therefore, although Tableau appears to have the secret sauce, and the digeratti has put it in the top spot in its niche, based on macro conditions, I'm betting Tableau Software trades lower along with the overall market in the next three months. After all, Tableau is expensive on a price/sales metric. P/E ratios aren't really relevant with young growth companies...at least not in this market, but maybe they should be. Companies with limited earnings may be the first to be liquidated if investors get defensive.

My buy point is between $80-$90 a share. An almost 20% decline. This will be especially true if the FED raises interest rates in September.

Twitter: The Grace Period is Over

In a take-no-prisoners trading culture, there was a mass exodus of investors in Twitter (TWTR) after interim CEO Jack Dorsey and CFO Anthony Noto reported anemic user growth in the Q2 2015 Conference Call. Originally, Wall Street liked the results of the second quarter when the earnings press release first hit the Web. According to the document, sales of $502 million for the quarter, up 61% year-over-year, and above the previously forecast range of $470 million to $485 million. The stock shot up over 7% in after hours trading.

However, the equity did an about face a few minutes into the conference call when the executive team discussed user growth, or lack thereof. The gears of capitalism ground to a halt, and the stock not only lost all after hours gains, but descended to near all time lows the next day of trading. Here are some quotes from members of the C-suite from both the prepared statements and Q&A session that accelerated the selling:

• "Specifically, we do not see organic growth."
• "Simply said, the product remains difficult to use."
• "Our growth rate in users is slowing quite dramatically."
• "We will take the necessary time to build the service people love to use every single day. And we realize it will take some time to show results we all want to see."
• "The DAU (daily active users) to MAU (monthly active users) ratio has gone down...because we’ve grown MAUs faster than DAUs, and we have not historically focused on driving daily active user growth."
• "Our organic growth is going to be very low as it was this quarter, and as I think about Q3, it’s marginally better, but I wouldn’t want you to or anyone else to expect a change in our growth rate relative to what you are seeing in this quarter."
• "We have only reached early adopters and technology enthusiasts, and we have not yet reached the next cohort of users known as the mass market."

That assessment is about as succinct as you'll get from high-tech management, or management in any publicly traded company. My hat's off to Jack Dorsey and Anthony Noto for not sugarcoating prospects going forward. However, it wasn't a bad quarter. Besides beating on the revenue front, Q2 adjusted EBITDA was $120 million, up 122% year-over-year. This is above the previous forecast range of $92 million to $102 million.

I believe a big problem with Twitter is perception. Early investors just got seduced by the Wall Street marketing machine. People thought this global brand on the digital frontier would be an instantaneous profit generator. In reality, it was an unprofitable story stock from the get go. If you bought the hype thinking the share price would be in an automatic upward trajectory, you got dealt a cruel hand. The equity may reach it's previous all time high of $75/share again, but that may take some time the way sentiment is going.

Twitter has some new initiatives going for it, which may be why Twitter bulls cling on to lofty price expectations. Most importantly, the company appears to have a growing relationship with Google (GOOG). Tweets are now integrated in the daily search of Google domestically, but only on the desktop. Mobile is a work in progress. In addition, there are other languages they will be expanding into internationally with Google desktop search, specifically within English-speaking countries.

A partnership with Google's DoubleClick will help improve advertising performance measurement. There's been speculation in the business press that Google would be a good suitor for Twitter, and that may be so, but that's just speculation. With Twitter's market cap of $21 billion, it would be an expensive acquisition for Google. Plus, regulators would have to approve the deal.

The acquisition of TellApart in late April is also discussed in the Q&A session. TellApart will remain a standalone business, although under the Twitter family of companies like Periscope and Vine. The marketing technology company provides retailers and e-commerce advertisers with cross-device retargeting capabilities. At this juncture, Twitter has no plans to monetize TellApart. Twitter paid $533 million for the company, so that just adds to the mounting expenses the corporation has accrued recently, including increased headcount and infrastructure build out. Nevertheless, these expenditures are a necessity to stay current in today's social media environment.

Like all companies, Twitter is in a state of perpetual flux. The partnership with Google, and the acquisition of TellApart, helps monetize the rabid base of over 300 million active monthly users. However, if current management plans come to fruition, Twitter may be taking steps backwards by making the service easier to use. In doing so, you take the chance of alienating the current user base, which may dilute end-user participation. Twitter is not a mass market product like Facebook (FB). It's a niche product.

Going toe-to-toe with Facebook would be a big mistake in my opinion. Facebook has 1.5 billion monthly active users, five times the population of Twitter. You need to invest intellectual capital to become well versed in Twitter. Therefore, you may have a more affluent user base. Facebook is basically plug-and-play. Octogenarians posting pictures of their grandchildren and other family members, to stereotype the process. Both demographics are important to advertisers, but followers on the Twitter communication platform may be more qualified, allowing higher advertising rates. After all, it's the Millennials and Gen-Xers that primarily use the communications service.

It was only a few weeks ago that I wrote my previous article about Twitter. To recap, I thought the equity was expensive, and that I wouldn't pay any more than $25/share for the company. With a trailing twelve month price/sales ratio of roughly 15, and very little earnings visibility, it's still expensive despite the recent selling spree. With a range bound stock market looking to take a breather, I'll wait on Twitter. It was a one-sided love affair on the way up, now a messy divorce on the way down. If I'm patient, I may get my price.

Mobileye: Autonomous Driving Pure-Play

Performing the song "Roadhouse Blues", Jim Morrison of The Doors once sang:"Keep your eyes on the road, your hands upon the wheel.". If management of Israeli firm Mobileye NV (MBLY) is correct, this mode of driving will become antiquated in the not so distant future. In fact, they're betting the farm on it with their proprietary System-on-a-Chip [SoC] technology called EyeQ. The current iteration of the product is EyeQ3, and has positioned the company as the global leader in the design and development of camera based ADAS (Advanced Driver Assistance Systems).

Developers are tackling the the technological challenges of autonomous driving through the use of sensors and imaging devices such as radar, lidar (lasers) and cameras. Although automakers are in the early innings of developing self driving cars, Mobileye appears to have trumped the competition because camera based systems have the scientific advantage at this juncture. At least this is my interpretation of Mobileye management's take on it.

There's been much speculation on the Internet the last year about driverless automobiles. Google (GOOG) has received most of the press, but now Apple (AAPL) and General Motors (GM) are coming into the conversation. Although all three of these organizations may take part in the autonomous driving mix somewhere down the line, it's Mobileye that's the pure-play in the field. What does Mobileye do with your car? Here is the layman's description of the company as stated by COO Yonah Lloyd in the Q2 2014 Conference Call:

Much like the human eye, the Mobileye Solutions performs driver seen interpretation, detecting and classifying different objects in the road including vehicles, pedestrians, traffic signs and more. The systems capabilities range from providing lane departure warnings, forward collision warnings for vehicles and pedestrians, to more complex driving enhancement features such as autonomous emergency breaking.

Mobileye's client list is a literal Who's Who of car manufacturers with the exception of Toyota. The company's c-suite doesn't believe they can get Toyota into the fold until 2018, if indeed Toyota decides to become a customer. In addition, there is usually a five to seven year period when they are first introduced to a manufacturer until their product is included in serial production. So don't expect the number one automaker to add to Mobileye's top line anytime soon.

However, the company is in good shape with the current car manufacturers under contract. In 2016, there will be 244 car models utilizing EyeQ3 technology. Below are some specific applications of the Mobileye solution in today's world:

• In September, GM announced that it expects to release cars equipped with hands-free driving abilities on highways. GM is calling this feature the Super Cruise, which includes Mobileye technology, and it's expected to be available in 2016.
• Tesla announced plans to provide all of its Model S cars with full ADAS functionality, which also includes Mobileye camera technology.
• Mobileye is in the new Ford Mondeo sedan where their system can help determine if a person is crossing the road, and if needed can reduce the brakes up to full automatic stop. Ford expects the car to be available in Europe during 2015.
• The Audi Q7 will be showcasing Mobileye's most advanced capabilities. Specifically, the capacity to perform full breaking collision avoidance.

The corporation is not resting on past laurels. Mobileye maintains their cutting edge by by plowing a substantial portion of their revenues back into research and development. Approximately thirty-three percent in 2014. Commercial shipments for their next generation product EyeQ4 begin in 2018. Ten times faster than its predecessor, EyeQ4 will enable the use of seven cameras, which will help bridge the gap from semi-autonomous to autonomous driving. The chip is developed in collaboration with Mobileye partner STMicroelectronics (STM), as were previous generations.

As stated in the inaugural annual report, Mobileye management believes the total addressable market for camera-based ADAS systems for autonomous driving could reach $15 billion in the next several years. Management believes they will capture a substantial share of this market because of four reasons. One, long penetration cycles. Two, the data they have generated over the past 15 years allows them to optimize their proprietary algorithms. Three, they have the most advanced and most cost effective system in the market. Four, they have succeeded to lead in innovation, and bundle applications in one compact system.

Sounds great, but here's the rub. Hyperbolic headlines in the business press touting the wonders of self-driving cars may come to fruition, but not for another ten years according to CEO Ziv Aviram. It's a process that will come in increments. Although Mobileye is in the pole position with its SoC for automated driving, it has gotten way ahead of itself on a valuation basis. There's an old stock broker's mantra of "Sell the sizzle, not the steak.". Overzealous Wall Street pundits may be pushing up the price of Mobileye because it's the fair haired child of the semiconductor and automotive industries.

In this investing environment we are currently in, investors are paying up for growth. Especially freshly minted Initial Public Offerings. Mobileye had its IPO in July of last year, and it's been a thrill a minute ride for investors with the stock doubling in twelve months.

Source: Yahoo! Finance

Nevertheless, the equity is very expensive if we utilize traditional valuation metrics. Forward P/E (for the full year 2016) is a whopping 85. This is based on the average analyst earnings estimate of $.71/share. Earnings growth is projected to grow in the 80% range for the next two years, which is why traders may have elevated the security in addition to the overall autonomous driving market hype. Price/sales doesn't get any better with the trailing twelve month figure at 84. As of June 30th, the short float was 13.2%, and may be higher because the stock has escalated.

Revenue guidance for full-year 2015 is only $217-$218 million, but Mobileye has a market cap of $13 billion. This is not an optical illusion. Although sales growth is a healthy 51% compared to 2014, the equity is way over its skis, ready for a tumble if it misses earnings estimates. The company doesn't give quarterly earnings projections, and has stated quarter-over-quarter results can fluctuate due to timing of orders, and the introduction of new vehicle models containing Mobileye products.

Although this is an exciting company, the time to buy Mobileye was four months ago when it traded in the $30 range. At $60/share, it's buyer beware. Patient investors may get a better entry point after the next conference call in early August. Better to let the day traders and momentum machines sell their shares to each other for the time being.

Critero S.A.: Big Brother is Watching You

Deep-Data Integration. Digital Performance Marketing. Individualized Performance Advertising. These are the current corporate terms used to describe ad targeting firm Criteo S.A. (CRTO). Their computer science is the creepy, but useful cyber stalking technology that enables advertisers to bombard you with personalized advertisements wherever you go on the Internet. They do this by dynamically matching your recent Web browsing history via cookies with predictive software algorithms.

For example, shop for laptops on an e-commerce site like Amazon (AMZN), and you'll spend the rest of your browsing session looking at banner ads highlighting Amazon's best available computer wherever you go in cyberspace. The sophisticated technology relies on programmatic buying for relevant consumer options that benefit the advertisers as well. Programmatic advertising is the real time automated bidding, buying and placement of banner ads.

Criteo was incorporated in France in 2005, and began selling their solution primarily to Western European companies two years later. They have since established a global footprint, and can now claim 7,000 clients in Europe, the United States and Asia. As of January 1st, 2015, 88.3% of Criteo's revenues were generated from outside the home country. All financial statistics for the past three years are reported in Euros:

Year	2012	2013	2014
Revenues	€271.9 million	€444.0 million	€745.1 million
Revenues Excluding Traffic Acquisition Costs	€114.1 million	€179 million	€303.7 million
Net Income	€0.8 million	€1.4 million	€35.4 million
Adjusted EBITDA	€17.4 million	€31.3 million	€79.4 million

Business is booming for the small cap company. They're profitable, too. Investor's Business Daily claims Critero's annual earnings growth is projected to be 31% or higher over the next three years. During the last conference call, the company raised full year 2015 guidance for Adjusted EBITDA to between €120 million and €127 million. If we split the difference and use €123.5, it would mean a gain of 55.5% for the year. Wall Street took notice, and the stock continues to rally.

Source: Yahoo! Finance

Addressable Market:

According the the Annual Report:

• Business to consumer retail e-commerce was approximately a $1.3 trillion industry globally in 2014, growing at 19.5% per year from 2013 to 2017, according the eMarketer.
• Goldman Sachs has stated penetration of smartphones and tablets has driven rapid growth of mobile commerce, which represented $61 billion globally in 2012, and is expected to grow at a 53.3% compound annual growth rate between 2012 and 2017.
• ZenithOptimedia reports marketers spent $122.1 billion on Internet advertising in 2014, with this spend expected to grow at a compound annual growth rate of 15.5% through 2017.

Catalysts:

Investor's Business Daily. The newspaper many consider to be the primary print source for momentum traders gave the company plenty of ink the past three months. From my experience, stocks IBD features in their "New America" column, and are highlighted in the IBD Top Fifty Stocks, tend to stay in motion until dethroned by a bad earnings call. Critero is in the sweet spot for revenue acceleration because of e-commerce trends, and sells for reasonable valuation metrics for a growth technology stock. I anticipate the equity going higher after the next conference call in early August unless expenditures get out of hand.

Analyst expectations are getting elevated for Criteo. Out of the twelve Wall Street firms that cover the stock, ten have a Buy, or, Outperform rating on the security. Last week, RBC Capital Markets initiated coverage with an Outperform rating. This goosed the price per share. If Critero has another good quarter, other brokerage firms will initiate coverage, or, up the ante for price appreciation.

The partnership with Facebook (FB) just got stronger. According to comScore data, Criteo ads reached 1.1 billion unique users worldwide on the desktop in March. Many of these end users may be part of the ever expanding Facebook universe. Now that Facebook has recently released Dynamic Product Ad for mobile devices, Critero has access to Facebook's mobile ad inventory. This could be a boon for sales going forward.

Finally, the Criteo Engine's ability to match shopping data across multiple devices is a new phenomena for the company, and will increase revenues. We have transitioned to a mobile world, and working with end users on desktops, as well as smartphones and tablets, keeps Criteo ahead of the competition. As is, the company has a 90% client retention rate. By the end of last quarter, 84% of customers were using the Criteo multi-screen solution.

Caveats:

Michael Corleone in The Godfather Part II is famous for saying: "Keep your friends close but your enemies closer.". Although the technology sector makes strange bedfellows, Critero should probably follow Michael Corleone's advice. The annual report sites Google (GOOG), Amazon, and Yahoo (YHOO) as well-established competitors. They are also customers. For instance, the latest conference call states several new clients were added including Hubbub, a subsidiary of Amazon.

In addition, Google is also one of the largest publishers working with Critero on the supply side. As Investor's Business Daily reported:

"In the self-serve formula, retailers or advertisers can bypass a manager such as Critero and go directly to ad platforms found on Facebook, Google or other ad publishers and suppliers. This path poses a competitive threat to Critero.".

We live in a do-it-yourself world, and companies are always looking for ways to cut costs, and raise productivity.

Plus, there's always the threat of Criteo's bread and butter technology being leapfrogged by another entity. Two weeks ago, Apple (AAPL) announced a content-blocking feature for the soon to be released iOS 9. This translates into blocking banner ads in mobile browsers. Stocks in the advertising sector went down in unison for a week following this announcement. This includes Criteo. The stock has bounced back in tandem with the overall market during the past seven trading sessions.

Valuation:

This is not an expensive stock using traditional P/E and PEG Ratios. Although the trailing twelve month P/E is a lofty 74, the company's earnings are growing close to 89% for the current quarter. This gives us a PEG ratio of below one. That's in the wheelhouse for many technology investors. Wall Street is always looking forward, and when we examine the forward P/E ratio for the end of 2016, it decreases to 35. Trailing twelve month price/sales is also very reasonable at 3.5. Not dirt cheap, but you're not going to get a growth stock at distressed prices in this investing environment.

Conclusion:

Critero trades at an all time of $55, bucking the trend of European equities that have faced serious tailwinds in a recessionary environment. Nevertheless, this is a dangerous stock because of its small market cap of 3.5 billion, plus the fleeting nature of technology superiority in individual companies in the early 21st Century. However, the window for investors to hold an equity gets smaller and smaller as each day passes with actively managed mutual fund managers trying to beat high frequency trading platforms and index benchmarks like the S&P 500. I believe if you have a holding period of three to six months, you may make money with this one.

Twitter: A Bottom Fisher's Perspective

"A-Well-A Everybody's Heard About The Bird." - The Trashmen signing 'Surfin' Bird' circa 1963.

The Twitter (TWTR) logo is one of the most recognized icons of the past few years. It permeates the media landscape on The Internet, and on broadcast television. Go to ESPN, Reality TV Programs, Game Shows, Talk Shows, or your local and national newscasts, and attempt to avoid it. It can't be done. It's everywhere.

Although Twitter is an integral part of contemporary culture, all that free publicity hasn't added up to a very profitable company, or, total world domination like its contemporary Facebook (FB). Facebook has over a billion Monthly Active Users while Twitter languishes at over 300 million. Why? Twitter is more difficult to use. Twitter isn't a plug-and-play application on the desktop computer, or, on your smartphone the way that Mr. Zuckerberg's products are. Quite the opposite. You must have some computer knowledge, or at least have the technological intuition to begin building a timeline on Twitter.

During the 2015 Q1 Conference Call, former CEO Dick Costolo (who still has a relationship with the company although co-founder Jack Dorsey is back at the helm as interim CEO) stated: "After five consecutive quarters of more than 97% year-over-year revenue growth, we under performed against our expectations. We anticipate the factors that affected our first quarter results will also affect our 2015 guidance.". This translates into a potentially rough six months for the company. Wall Street took notice and the stock got hammered, dropping from close to its 52 week high of $55/share to the mid $30 range where it currently trades. It got as high as $75 in late 2013.

Twitter makes most of its sales from advertising, and revenue growth decreased to 74% for the quarter. It's commonly known that there's been a big migration of advertising dollars from traditional media such as newspapers, magazines and television to the Internet. There's also the current movement from personal computers to mobile devices. Advertising budgets follow the eyeballs, and the big players in both the desktop and mobile arena are Facebook and Google (GOOG). A December 2014 eMarketer article breaks down and projects the domestic mobile advertising market to 2016.

As is presented, Twitter only maintains a three plus percent share of the American mobile marketplace through 2016. The United States is where they do the bulk of their business. However, they do have an international presence, and are working on improving the existing product. If you go by the chart, Twitter isn't picking up too much market share. During the last conference call, former CEO Costolo notes that there is a company-wide three prong approach to building the consumer base to increase those eyeballs and click throughs for the advertisers:

• Strengthen Twitter's core. (Make it easier for novice users to create timelines, and engage in activity. Easier said than done. Once you lose a customer, it is difficult to get them back.)
• Remove barriers to consumption. (Increase the monthly active users. Besides the 300 million monthly active users, an additional half billion people monthly visit Twitter, but don't utilize the service to its fullest potential.)
• Build new applications and services.(For example, the relatively new service Periscope which enables end users to create video vérité on their smartphones, and share it with the Twitter's minions.)

Despite the game of musical chairs in the executive suite, Wall Street bulls point to Twitter's potential. The current company game plan requires an enormous cash outlay to build infrastructure, and increase selling, general and administrative expenses. Last quarter, Twitter took in $436 million, but spent $389 million in non-GAAP expenses. As a result, Q1 GAAP EPS was reported at ($0.25) and non-GAAP EPS of $0.07.

Bottom line is that Twitter isn't making much money, but neither are Amazon (AMZN) and Netflix (NFLX), two other companies that dominate the decade, but that hasn't stopped their shares from moving to all time highs. Twitter, on the other hand, is getting close to its all time low. Granted, all three companies have different business models, but Twitter is the one based on advertising sales. Advertising budgets are usually set on an annual basis, and those advertising dollars may not be allocated to Twitter until the end of the year.

Full disclosure, I'm one of the 300 million monthly active users on Twitter and am a big fan of the company, but not the stock because of lofty valuations. For instance, for full year 2015, the company estimates sales to be between $2.12 billion to $2.27 billion. That's with Twitter's current market cap of $24 billion. Very expensive.

Because Twitter lacks substantial earnings, you really can't value it on a P/E, or PEG basis. My personal preference for technology companies is the price-to-earnings divided by growth calculation. Not going to work for this one, which further solidifies my belief that it should never have gone public. Twitter could have raised needed capital via private equity the way that Uber and Airbnb do.

Trailing twelve month price/sales is 14.5. Ken Fisher, who developed the metric back in the early 1990's, believes it may not be as accurate a barometer as it once was, but it's still useful nonetheless when you've got nothing else to go on. Even if you double sales the next twelve months, the price/sales ratio would still be humongous based on Mr. Fisher's teachings.

Based on consensus analyst expectations, Yahoo! Finance reports better numbers going forward for Twitter. The problem with utilizing average analyst expectations, is that they vary to a great degree. It's like Donald Trump claiming he's worth 10 billion dollars, then Forbes refuting that and saying it's more like four billion. However, it's what we have to go by because it's a relatively new public company.

EPS for full year 2015 is $.34, with the lion's share coming in the December quarter. For 2016, this number almost doubles to $.67 for the full year. Impressive growth, but what if they continue to spend money for expenses at unreasonable levels, and gain market share at a snail's pace?

There's not a big short float on the stock, just 4.6%, so the Wall Street believes Twitter may be reasonably valued. Twitter's IPO price was $26, but it opened at $46 on the first day of trading. From my perspective, the investment bankers got the valuation correctly, and the stock may get back to a more reasonable level after the next conference call on July 28th.

At this juncture in time, I wouldn't pay any more than $25/share for Twitter. I'm not going to chase it, especially when we are so close to the next earnings release. Although I believe the equity should be given a premium because of its unique communications platform (it really has no peer except Facebook, and that's not an apple to apple comparison), I'm betting that it may go lower based on valuation, the nature of the advertising business, and the upheaval at the helm.

It Was a Very Good Year

In 2013, the S&P 500 was up 32.39% when you include dividends. Individuals in S&P 500 Index Funds such as the Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 (IVV) or the more renown SPRD S&P 500 (SPY), did a land office business. Hedge funds didn't fare so well according to Bloomberg Business, "Hedge funds returned an average of 7.4 percent in 2013, after a gain of less than 0.1 percent in December...Funds lagged behind the S&P 500 by 23 percentage points.".

Fast forward to 2014, and again, the S&P 500 index was up a compelling 13.69% including dividends. BarclayHedge (no affiliation with Barclay's Bank) research shows that Hedge Funds also lagged the S&P 500 in 2014 with only a 2.88% gain. That's not to say all Hedge Funds did poorly, just on the aggregate, the average Hedge Fund under performed passive investing by a long shot. I think it should be stated that by nature Hedge Funds are "hedged" to protect the investor when the market depreciates, so you wouldn't expect some of them to have banner years in an uptrend in the markets.

Nevertheless, statistics show since the crash of 2008-2009, index investing has handily beaten their more expensive competitors, the Hedge Fund. It is also common knowledge in investing circles that over the long term, actively managed mutual funds tend to lag the primary American benchmark, the S&P 500, the majority of the time. There are instances when various sector mutual funds and ETFs outperform the S&P 500. As an example, for the past three years, biotechnology funds and ETFs have been very good to investors. iShares Nasdaq Biotechnology ETF (IBB) gained 177% in the past three years, and is up almost 30% year-to-date in a flat year for the S&P 500.

However, hot sectors like biotechnology tend to be outliers. There's also the dilemma of when to get in and when to get out. Market and sector timing is an inexact science for the novice and professional alike. It's because most actively managed portfolios tend to lag the market, I liquidated all if my individual equity positions at the end of 2013 after a less than stellar performance, and have gone into well diversified index ETFs. In 2013, I didn't do as poorly as the hedge funds, but I left more money on the table than I wanted to in a concentrated portfolio of primarily small to mid cap securities.

Small to mid cap stocks tend to be very volatile. You must have a cast iron stomach to roll with the punches in a high beta tape. I bought Facebook (FB) after it got cut in half at $18, and this resulted in a four bagger in a little less than two years. Somewhat lucky, but a good call nonetheless. However, there were too many others that didn't fare so well, primarily in the smartphone infrastructure and component arena. Although this is a very exciting time in which we live in regards to technology companies, the game changing science in many of these equities becomes obsolete in a matter of months.

I prefer to buy and hold my investments to minimize trading costs and capital gains taxes. Investing in some of the smaller entities that power our iPhones and Android devices seemed like a prudent idea for a small period of time, but didn't pan out the way that I planned. I had to trade too much to keep up with the ever changing computer science. This, coupled with the undeniable statistics that passive investing in a well diversified index fund or ETF is better for your bottom line, caused me to alter my investment thesis.

Back in the late 1990's, I read "Winning the Loser's Game" by Charles Ellis, which is considered the bible for index investors. At that juncture, I was on a hot streak in NASDAQ stocks like Cisco (CSCO) which needs no introduction if you were investing at that time. I fully understood and appreciated the concept Mr. Ellis discussed in the book, but my personal preference was with Robert Hagstrom and his best seller "The Warren Buffett Way". Hagstrom's contention that a concentrated portfolio is the optimal way to invest if you follow the wisdom of The Oracle of Omaha. I followed the advice of Mr. Buffett, and did well.

Times have changed. With the advent of High Frequency Trading, and computerized Web bots that scour the Internet at warp speed assimilating information, the teachings of Benjamin Graham and David Dodd seem outdated in today's world. Although I believe the concepts of "Security Analysis" are still intact, Warren Buffett, the most famous pupil of Value Investing, suggests that individuals use a plain old vanilla index fund. That's a good enough endorsement for me.

So where does that leave this blog? After a sixteen month hiatus, I have decided to continue writing articles about ETFs and individual securities. Although 95% of my equity investment allocation is in either S&P 500 index ETFs, and to a lesser degree the Vanguard FTSE Europe ETF (VGK), I'm still sitting on a small cash position. There are always alpha opportunities to be had in sector ETFs like The Pure Cyber Security ETF (HACK), which has outperformed the market this year, and individual stocks like Netflix (NFLX) and Apple (AAPL) which have also done well. I am not planning on buying or writing about any of these at this point, but they are examples of what is to come going forward.