Have you taken a look at the charts of travel internet company Travelzoo (TZOO) in the past few days? Not as crazy as investors in 3Par or other acquisition targets but it remains impressive to see how much the stock has gained in recent action.

Monday I could not open a new trade because I still have 5 live trades but one stock that was discussed in the Premium Newsletter last weekend was Travelzoo. I would not go short a stock that gained over 25% in a couple of days to a avoid being against such strong momentum but it would certainly make sense to strongly consider shorting the stock when things will calm down a little. I have shorted Travelzoo against Priceline earlier this year with great success mostly because valuations were not consistent with a stock that has not generated that much growth in recent years. So why does it trade so high? Because for some investors Travelzoo shareholders are easily excitable.

It happened again

The odd thing about the recent rise is that there wasn’t anything “material” behind it. The main factor that contributed to Travelzoo’s rise was an announcement that it would start offering a “Groupon” like service. What is Groupon? It has been at the centre of a lot of hype in recent weeks as it gains a lot of traction similar to what Facebook & Twitter experienced after a few months. You can visit the website if you’ve never heard of it but basically it gives out coupons targetted to where users live. The concept is simple but brilliant and has been generating copycats everywhere.

Travelzoo will certainly be able to generate business by using the concept but will it be enough to justify a 25% increase? Not likely I would say. They do have millions of emails and will certainly put effort into getting more info about the subscribers such as the city they live in, but so do competitors such as Expedia (EXPE) and Priceline (PCLN)

After picking Ebay on Monday’s stock pick (long Ebay & Short IACI), I had hinted as to how I valued the company. Ebay is one of the original dot coms, it was part of the huge internet boom and like a select few, emerged as a survivor while so many others like Altavista, Pets.com, Lycos and others either were bought or went bust. But Ebay had carefully selected its niche and was heads and shoulders above everyone else… Since then, a lot has changed and while Ebay still has a promising future, it might now have almost nothing to do with the niche it had originally selected; Peer-to-Peer ecommerce.

Ebay was founded in 1995 and quickly became one of the best examples of how the internet would change the world. Suddenly, buying a used cd, a computer or even car was only a few clicks away. Ebay’s revenues came from modest listing fees as well as small commission on the successfully sold items. The business grew very fast and to be honest there was very little competition out there. The growing business was helped by a new Ebay division: Paypal. It became, thanks to Ebay the standard method to exchange money electronically online. It was convenient because it helped buyers and sellers settle trades more easily and with confidence. Who would have guessed that the side business would eventually overtake the whole business..

Ebay then became briefly involved with Skype, a start-up bought in Estonia in 2005 that quickly became the standard in terms of VOIP communications. It seemed like a promising project but it wasn’t clear how Skype would be integrated into the global Ebay strategy, a problem that Paypal did not have. Thus, Ebay decided to tell most of its stake back in November and concentrate itself on its core business…

What is Ebay’s core?

Like any other company, Ebay was trying to generate more top and bottom line growth and took the wrong approach. Instead of putting efforts into gaining more users and more transactions, it decided that another strategy would be more successful. Ebay raised fees charged to sellers in an effort to increase its own revenues. That backfired big time and while Ebay did eventually bring back smaller fees eventually, but not before losing many users and a lot of momentum. Many of the sellers fled to “free listing” websites such as Craigslist. Ebay did battle it out but things have not been the same since. It might have happened anyway but it certainly happened a lot more quickly because of that momentum and Ebay has been very defensive ever since…Ebay decided to put more focus into other websites and became owner of Kijjiji and also a shareholder in Craigslist. Both moves have certainly looked a lot more like defensive moves as they helped Ebay hold on to its market share but revenue and profit growth has never been the same since…

But that other division, Paypal has done much better

Paypal, which had been created to help the auction & ecommerce portion of the company has continued to experience strong growth as it has been at the center of ecommerce throughout the web, not simply for auctions. Even businesses such as our own company use Paypal for most of their online transactions and that has resulted in climbing revenues as commerce moves online. Many services also do business with Paypal which creates recurring income streams with little to no intervention necessary… a perfect business right?

Competition

The most surprising aspect of Paypal is that no major competition has tried to compete for this huge market. Players like Google, Microsoft and Yahoo have remained on the sideline and while some solutions such as Google Checkout have been tested, they did not:

-Gain as much popularity as expected
-Offer the complete range of solutions to compete with Paypal

Because of that, Paypal has kept a significant pricing power and continues to charge high fees thus bringing high margins. Paypal now represents almost 50% of Ebay’s revenues and most of the revenue and profit growth comes from the payments unit. Ebay has talked on and off about spinning off the unit but frankly that would not make much sense.At some point, I don’t think it makes sense to consider Ebay an ecommerce/auction website and that moment is right now in my opinion. Looking at the last quarterly results, it becomes clear that Ebay will go as far as Paypal can take it.

Facebook

The one company that seems to be ready to go ahead to compete with Paypal is Facebook as it prepares the launch of its Facebook credits, a virtual currency. This could be a real threat given the number of Facebook users (now over 500 million) and how much users have been trusting the social network with so much information. This could become a real threat to Paypal and will need to be monitored very closely. Paypal already knows it will lose market share because many of the games used through Facebook have been forced to use Facebook credits exclusively in the near future… how much damage it will do is difficult to judge for now but I am certain that Paypal executive are following the situation very closely.

Change of strategy…

In the past, Ebay would open its flagship websites in countries and then later on offer Paypal to those citizens. That is starting to change and in fact Ebay’s recent announcement to open Paypal to Japan is the first time that Paypal is offered to a major country without the auction website. This clearly supports our conclusion and we would now consider Paypal much more as an online bank.

P/E

Ebay trades at a very low P/E ratio, around 14 which is comparable to stocks such as AOL (AOL) and Microsoft (MSFT). I tend to find the stock attractive based on that valuation, especially considering the fact that as Paypal gains importance in the company, the growth should follow.

Pros/Cons

Here are the main pros and cons of the “new” Ebay:

Pros:

-Higher margins
-Little competition
-Many outstanding opportunities

Cons:

-Arrival of Facebook as a competitor
-Still over half of its business from the slow growth auction/ecommerce

So I am generally bullish on Ebay, how about you? Any thoughts?

I’ve been a fan of Amazon to a certain extent in recent months but have been very critical of Amazon’s continued focus on the Kindle will end up costing Amazon. The electronic reader has been losing market share very quickly to Apple’s Ipad and with Amazon announcing last week that it was now selling more electronic books than physical ones, an important portion of Amazon’s business is under threat.

Not that bad

Just to put things under perspective, Amazon did report earnings per share of $0.45 which is almost 50% better than the same quarter last year. However, it is also well below the analyst expectations of $0.54 not because of a lack of revenues (they were more or less in line) but rather because of profit margins that were much lower than anticipated. But it is all about expectations and there is no way Amazon lived up to those.

Margins will improve but not enough

One of the big reasons why margins failed to meet expectations was the major price cut in the Kindle as Amazon continues to try to stop the bleeding. It followed Barnes & Nobles’ Nook and tried to use a lowe price point to convince consumers to use the Kindle instead of Apple’s Ipad. Unfortunately for them, Apple’s consumers to not seem to be very sensitive to price changes which means that even taking prices down will not help much…

Over time, as Amazon continues to move towards digital goods, its margins should improve simply because the costs are smaller, there is no shipping but that will not be enough. Competing with a company whose consumers do not mind paying more means that there really is little that Amazon can do right now except refocus on its core.

Consequences of the Ipad’s dominance?

The problem of course of losing market share, especially to Apple is that it will greatly diminish Amazon’s powerful spot as the world’s greatest book store. Yes, living in an Apple world will be difficult for Amazon, just ask Research in Motion how things are going. Just yesterday, Amazon was able to secure a deal to be the exclusive seller of some of the most known books from the 20th century. I strongly doubt that such deals will be possible if Amazon keeps losing market share as these publishers will end up wanting to get access to as many potential customers as possible. The other main problem is that all of Apple’s consumers take the “choice” of getting “no choice” when they purchase Apple’s products. What I mean is that Ipad owners will be buying their books on Apple’s Itunes when they decide to purchase books & magazines. It is their preferred option which will remove Amazon as a potential consumer for millions and millions of consumers. There are other ways to buy books such as Amazon’s application on the Iphone/Ipod/Ipad but the vast majority of users continues to buy directly from Itunes.

Consumer struggling

Another very difficult aspect of Amazon’s business is that it relies heavily on the US consumer which continues to struggle as the economy shows limited recovery.

Stock in free fall?

After seeing Netflix (NFLX) crash down and lose about 13% of its value yesterday, will Amazon be next in line tomorrow? It certainly looks that way as the stock traded between 15% and 20% down after hours, incredible for the internet darling….Could Amazon fall below 100$? Very unlikely and I certainly don’t expect that to happen but even a loss of 10% would be huge for Amazon as things continue to be tough for CEO Jeff Bezos.

Every month, we publish the list of the top 100 Dividend Yields in the S&P500. We have also published lists of the top dividend ETF’s and yesterday I did some research to see who was currently at the top of that list.  The one on top is PPH, a Pharmaceutical Holders Trust, which came out with a dividend yield of 12.67%. That seemed high didn’t it? Having done the top 100 dividend stocks just a few days ago, I was pretty confident the dividend yield did not make sense. So I looked around the web and other websites such as Bloomberg and ETFreplay had the same very high yield.

What is PPH?

“The Pharmaceutical HOLDRS Trust issues depositary receipts called Pharmaceutical HOLDRS, representing an undivided beneficial ownership in the United States-traded common stock of a group of specified companies that are involved in various segments of the pharmaceutical industry.” First off on my list to look into the dividend yield was understanding PPH. What is inside of it? How much dividends do the underlying stocks pay? Many ETF’s and almost all funds only reveal their positions in quarterly reports but some others such as this one gives out details every day (mostly because this specific one does not change over time in “normal circumstances”). So I went on the official website and the list of stocks was right there, easy to get:

Most of these stocks pay decent dividend yields but nowhere near the yield that PPH has paid in the last year. First off, I went to get out the current dividend yield for all of the stocks that constitute PPH:



So no, there is no way for an ETF that includes all of these stocks to pay out 12.67% of dividend yield as not even one of the stocks inside of it pays that amount.

So what happened then?

I decided to take a look at how PPH dividends are paid out. Turns out that it is even easier than most ETF’s. Every single time one of its stocks becomes ex-dividend, PPH also becomes ex-dividend. So yes it ends up  paying multiple dividends in  a few days sometimes. For example, PPH will become ex-dividend on June 11th, a dividend of 0.10928$. Where does that amount come from? Take a look at this chart with a bit more details:

On June 11, Merck & Co will become ex-dividend. If you multiply the number of shares per unit x the payout= 0.3007 x $0.39 = $0.117

PPH will be paying $0.1093, which seems to include some fees (contrary to many funds, PPH and other Holders Trust pay fees through their dividends since they do not have cash).

So what is the catch?

What screws up  everything is that PPH had a special one time payment of $1.47 in November 2009, a payment that greatly influenced the dividend payout but is not likely to repeat and is certainly not sustainable. So no, PPH’s true dividend yield is nowhere near 12.67%.

So what is PPH’s dividend yield?

It would simply be the sum of each stock included dividend yield x it’s weight in the ETF. Take a look at the chart below:

So what is PPH’s dividend yield? A still respectable 3.17%. Nowhere near the number presented above but still good enough to consider investing. So please be careful when investing in an ETF or any other stock by basing yourself only on the dividend yield, there is much more to it.

This case represents both the great part and the difficult part about having an online business. Ebay’s Paypal seems like a great business. It facilitates electronic payments between individuals and institutions. In a few minutes, users from almost everywhere in the world can create an account that will be linked to their bank account and/or credit card. Once that is done, users can buy or sell goods and services and avoid all the hassles involved in bank wire transfers, especially when not in the same country. The great part of course is that as Paypal gained users, it became the best way to do payments for almost all online transactions. I don’t have to tell you that the amount being exchanged on the web is important and growing fast.

No competition??

I’ve mentioned on this blog many times how surprised I was that Paypal was not facing more competition. It is huge and will be difficult to overtake, but that doesn’t mean no one will try right? Just ask Google. As big as it is, companies keep trying to compete in the search market. But for some reason, no major competitors have been able to pose a significant threat to Ebay’s valuable unit yet.

Online business pros and cons

The beauty of an online business is that it’s so easy to launch. Give me a few months and under 100,000$ and I could compete with most online businesses (some such as search wouldn’t be possible obviously), but even a sophisticated company like Paypal can be built from the ground quickly and without the millions of dollars involved in most offline businesses.

The downside of course is that any online business can become irrelevant or uncompetitive very quickly. Sometimes it will be because a company has not innovated or improved its product quickly enough. I would say that MySpace is one of those examples. But in other cases, the answer is far more complex and I would say that what could happen to EBay might fall into that category.

Possible competition has arrived

EBay is now facing possible competition from two major companies:

-Facebook – by all accounts the top social website and a major force in today’s and tomorrow’s internet has announced it would be building a payment system that will be used for all applications and other areas on the network. Suddenly, Paypal could be more or less forced out of transactions that are now generating millions of dollars.

-Iphone: The top Smartphone maker Apple has announced that a new peer to peer payment system would be made available, through an alliance with Visa and DeviceFidelity. It’s difficult to see how much of a threat this represents for Paypal but there is no doubt that it needs to be addressed. So much money flows through the Iphone that being locked out could become a major danger to its dominance.

Will Paypal remain #1 if both of these competitors are up and running in a few months? Perhaps. But unfortunately, Paypal will have little control over the next steps… When I see events like this, it helps me understand the behaviour of companies like Apple & Google. Both companies are clearly all about “hardware” and “search” but they are venturing very quickly into everything else. Google has gone from search to cloud computing, operating systems, phone maker and even broadband provider. The wider the company, the less chances it can get squeezed in the same way that Paypal might be in the coming months/years.

The same is true of Apple which has gone from hardware to an operating system, strict control over all content available on its devices, advertising and more.

Where will it end? It’s not quite clear, but I bet that Paypal will have its fingers crossed for some time now…

Adobe is a software company known mainly for two of its core products; Adobe photoshop and Adobe Flash. Flash is the language behind most of the videos viewed on the web right now, it is a language that was adopted early on by some of the major industry players such as Youtube. Generally, the company has been very quiet and has little competition in its very specialized segments. So how in the world did it end up with Apple (AAPL) as an enemy? Having one of the biggest and fastest growing companies in the tech space write a post describing why it will not support Adobe’s technology is certainly not a good sign for Adobe. That is exactly what happened today on Apple’s blog as Steve Jobs wrote a long post explaining exactly why Apple does not and does not intend to support Flash for its Ipod/Iphone/Ipad business. There are workarounds for specific applications such as Youtube but Apple has complete control over these workarounds and could change them at any moment in time.

The arguments are convincing and it will be interesting to see what Adobe’s response will be. They have been very vocal about their frustration regarding Apple so it would be surprising to not get a reply from Adobe. That being said, how much does this hurt Adobe? In reality, I would say not that much. It will certainly hurt the Flash revenues but those are not a major part of Adobe’s revenues. However, I think it could be seen as a similar situation as Apple vs Amazon where Adobe could be losing focus if it spends too much energy in this battle.

But what is actually happening?

The facts are simple. If Apple continues to refuse to support Flash in its devices, developers will be forced to work on alternatives as Apple continues to gain market shares. Those alternative languages are already very viable options and I would be very surprised if Flash didn’t lose some “market share” in the coming months because of the Apple problem. Sad? Absolutely. But unfortunately, especially after such an email, there does not seem to be much that can be done.

So is it a good investment?

The more worrying trend in my opinion about Adobe is its valuation, just take a look at the numbers below and you will see what I mean. A company that has negative growth should not sell for such a high valuation.

So the bottom line, should Adobe (ADBE) be sold? I don’t think the recent news and blog post by Apple should be the reason to do so. But at its current valuation, I will certainly keep it in my mind in my future stock picks.

It was well known that Palm was in financial trouble. With dwindling revenues and a very very tough market, it had very few weapons compared with Apple’s Iphone as well as the numerous phones powered by Google’s Android operating system. The US smartphone market quickly shrank from 4 major players (Google, Apple, Microsoft and Palm) to 3 and things were only getting worse for Palm. The problem of course when things are not going well financially is that suddenly your partners become less interested in doing business with you. That happened for Palm as it saw partners such as Verizon or resellers like Radio Shack threaten and in some cases stop selling the Palm phones.

I would expect such to more or less stop happening now that HP is behind the smartphone maker. HP does have power and a solid reputation which should be enough to both give confidence to Palm’s partners but also put some fear of having the major Sillicon Valley company as an enemy.

But the phone does not change

TechCrunch has reported that HP intends on keeping the WebOS operating system, seen by many as the biggest asset on Palm phones. That is good but it will also put much pressure on HP to come up with a strategy to compete with Apple and Google. In both cases, the major advantage seems to be in the applications available to those who use the system. While the number of apps available can be intimidating, the overall quality of apps available on Android and the Iphone is just beyond anything Palm can rival right now. And that will not change anytime soon unfortunately for Palm & HP,

Why it won’t change….

Since the apps are not driven by the companies but rather by private developers and companies, the environment needs to be attractive for them to work on your platform. And an environment that has a small and decreasing number of users is far from being attractive. Why work on an application for Palm when a successful app on Apple will generate 10 or 20 x the revenues. The competition is more fierce of course but in general that does not scare the best developers. Which means that those working on Palm apps are not the best, which in the end translates into an inferior user experience.

Is there anything to be done?

It is not game over yet. Google has proved how quickly it was possible to enter the market and in my opinion, it is all about giving incentives for developers. This could be done with major contests, offering cash prizes for the best applications or most downloaded apps, etc, etc. There are many possible ideas but I certainly think that Palm has more of a chance with HP backing it than it had on its own. It did not have the money or time to dedicate to a battle with Apple, Google & Microsoft. Now it does….

Today I read an excellent article from the NY Times (link below) about what seems to have happened back in December that caused Google to end up more or less getting out of China. We knew it was serious but it’s probably a lot worse than most of us could have even imagined. The problem of course is that if the Chinese government is involved, you can imagine how they would not be helping Google prosecute such attacks, giving incentives for these hackers to keep it going until they have what they need. Needless to say that the costs involved are incredibly high.

Vulnerabality…

This article is focused on Google but it’s easy to imagine any other target as well as any type of data being vulnerable to such attacks, something that remains very scary. I’ve been reading over and over about the threat of cyber-attacks and cyber-warfare and when you read about attacks like this, it becomes very clear that these methods are far from being science fiction. It has probably already been happening but not on a big enough scale or not with enough success to make it in the mainstream news.Of course, the US government has no interest in making it clear how vulnerable it is or what its weaknesses are and we will probably not have an accurate idea until something serious happens. Hopefully never but that is doubtful of course.

So what to do now?

Obviously, Google has tons of data, probably the largest set of data of any institution right now. And that is where much of the company’s value resides. So having Chinese hackers gain access to Google’s networks through Google’s Chinese operations was a major threat. There seems to have been two obvious solutions:

-Separating Google China’s network entirely from all other operations to give no opportunity for hackers that would succeed in attacks to gain access to US or other servers. Of course, that would be very expensive as it would mean duplicating all activities, security, administation, etc. Google decided instead to basically get out of China.

-Since China is not the only government to create such problems, Google has decided to be more vocal about the governments that are making such requests. A few weeks ago, the company publicly complained about Vietnam’s censorship And today, Google launched a website that will help track governments that are censoring the web.

Is Google doing the right thing?

There is no clear answer to that question but I think anyone who was judging Google’s response against the Chinese government should really take a look at the NY Times’ article. If such attacks can go on every day without punishment (because they occur on China’s soil), it becomes very expensive to secure the company against such attacks and the potential of losing important data is probably a lot more expensive to Google than the revenue it anticipates in China. Difficult to believe perhaps for many, but after reading this article, I’m a believer. Are you?

You can read the NY Times article here

Recently, 4 new tech stocks did their IPO and this weekend I took more time to look into them to see if one of them could be added to my dashboard. It does turn out that QuinStreet seems to fit the profile. They are an online advertising company that seems to have a similar business model to Valueclick (VCLK). It is not a terribly crowded arena but anytime you are competing with a player like Google (GOOG), it quickly becomes a challenging business.

Financial Statements?

Even though the company has just gone public, it does have a fair amount of financial history available for investors. You can take a look on Google Finance here. The major thing missing is more background on what has happened since the company used to be private. In general, QuinStreet seems to be growing although not at the pace you would usually expect from a tech IPO. But growth is growth and that is already more than what Valueclick can show off to its shareholders. The main question of course is how the company intends to keep up and accelerate its growth. I did not find much from the company’s website or press releases so I needed to do additional research .

Like any other new company, the amount of information available is fairly limited but I would say that what I found is that QuinStreet seems to be concentrated on a few specific niches, namely education and finances. That would seem like a smart decision but perhaps not one that warrants it current high P/E ratio.

Will I go long or short?

As I had discussed when I wrote about AOL, I usually tend to wait a bit before getting involved to get more information about the company, but I will be following up news and press releases from QuinStreet so you can expect to start seeing more written about it in the upcoming weeks and months with a trade perhaps coming late in the year if the opportunity presents itself. The most obvious trade would be against Valueclick which has a similar model, although it is far more broad in its business (not a positive in my opinion for such a small company).