4
2005-02-16
The Slamming of Audible.com's Stock Price
It's moments like this in the stock market that you get reminded of fear and greed. Audible had a fairly optimistic conference call and earnings report but its stock got skewered in after-hours trading, dropping more than $8. (For the record, I purchased shares during extended hours at prices around $18 to $18.50. I plan on averaging down if margin calls and sells bring it down further. Still have a lot of "dry powder" without touching margin.)
There is heavy short interest and a lot of misinformation out there on how to value Audible, particularly from anonymous posters on Yahoo! boards and their anonymous blogs. A typical reaction to this drop in stock price is finger pointing to "missed earnings estimates" based on management's forecasts for 2005. This kind of knee-jerk reaction misses the point.
First, Audible is a speculative growth stock. If you are in the stock to get reliable earnings or dividends, you are in the wrong place. Growth companies frequently invest earnings in building out their business. How do you evaluate growth stocks, particularly those with rapid growth and recent cash flow positive history? You look at their top line growth and, for a company like Audible, subscriber counts. You check to see if revisions in earnings projections are from problems (competition, erosions in margin, etc) or calculated management decisions to hit the accelerator on build out. From the conference call and earnings report we see:
Normally when a stock drops over 30%, you'd expect there to be horrendous news about its prospects. In Audible's case, the drop seems to have been over the slight revenue miss in Q4 relative to estimates, and the decision by management to use earnings to accelerate Audible growth in 2005 and 2006. The former is explained, in part, by the December-heavy subscriptions. Despite the better than expected # of new subscribers, their impact on this quarter will be dampened by the timing. Also, there was substantial deferred revenue from unused Christmas gift purchases and high-end subscriptions. The latter concern, the fear of missing earnings estimates, seems ridiculous for the most part.
If you read analyst reports and short arguments, the large red flag they wave is that of competition, and rightly so. When pointing at Audible valuation, they mostly neglect Audible's patents and foreign partnerships and exclusive licenses and software/hardware integration with a spectrum of devices and point to (1) the current audiobook market size and (2) the potential of a big competitor. But for some reason, when management forcefully addresses these concerns through a variety of initiatives, many people have tunnel vision for one set of numbers, the earnings metric, regardless of its suitability in this case. As I said before, if they thought this was Microsoft, they were mistaken and I, among others, will be happy to buy their shares. Audible should not sit on their $62 million cash, including the $48 million they just raised. They should proactively construct more barriers before real competition arrives. If they can do it while still remaining profitable, more power to them.
And one other thing should be said about the constant use of current audiobook market size as a gauge for Audible valuation. To me, this is worse than judging the size of the DVD and video-on-demand markets based on VHS sales. I was not an audiobook fan before Audible. Almost all of the 20+ people I got to subscribe to Audible were not audiobook fans. When you also consider the initiatives Audible will roll out to new content sources (podcasters, bloggers, etc), it seems shortsighted to place a ceiling on Audible's market using mostly US audiobook sales. Other bloggers, like the Internet Stock Blog, are intrigued with the possibilities.
I've posted additional commentary in Growth, Misinformation, and Valuation: ADBL Part 2.
There is heavy short interest and a lot of misinformation out there on how to value Audible, particularly from anonymous posters on Yahoo! boards and their anonymous blogs. A typical reaction to this drop in stock price is finger pointing to "missed earnings estimates" based on management's forecasts for 2005. This kind of knee-jerk reaction misses the point.
First, Audible is a speculative growth stock. If you are in the stock to get reliable earnings or dividends, you are in the wrong place. Growth companies frequently invest earnings in building out their business. How do you evaluate growth stocks, particularly those with rapid growth and recent cash flow positive history? You look at their top line growth and, for a company like Audible, subscriber counts. You check to see if revisions in earnings projections are from problems (competition, erosions in margin, etc) or calculated management decisions to hit the accelerator on build out. From the conference call and earnings report we see:
- 41,600 new subscribers, a 31% gain from the last quarter
- Most of these new subscribers came in December as a result of new marketing initiative rolled out in November, which means revenue from these subscribers do not strongly impact this quarter's results
- Management guidance seemed wildly optimistic with expectations for 260,000 subscribers in 2005 and more than 520,000 in 2006. To put this in perspective, Smith Barney's recent research valued Audible shares at $28 over the next 12 months, in part with estimates of 230,000 and 330,000 subscribers for 2005 and 2006, respectively. Does this seem like slowing growth to you?
- Audible UK will be rolling out in Q2 2005, and unlike Audible's partnerships in Germany and France, this service will be totally owned by Audible. Audible was willing to spend $2 million in 2005 for Audible UK because of very strong empirical data they were getting from tests, including data from iTunes UK. Management also said they projected Audible UK to be cash flow positive in 2006.
- Revenue guidelines for 2005 were $59 to $62 million, substantially higher than the $52 million estimate by Smith Barney.
- An Audible Education initiative will tap into the learning markets in Q2 2005.
- Audible Wireless will launch in Q2 2005. This service will be particularly important in the Asian and European markets where wireless is more advanced than the US.
Normally when a stock drops over 30%, you'd expect there to be horrendous news about its prospects. In Audible's case, the drop seems to have been over the slight revenue miss in Q4 relative to estimates, and the decision by management to use earnings to accelerate Audible growth in 2005 and 2006. The former is explained, in part, by the December-heavy subscriptions. Despite the better than expected # of new subscribers, their impact on this quarter will be dampened by the timing. Also, there was substantial deferred revenue from unused Christmas gift purchases and high-end subscriptions. The latter concern, the fear of missing earnings estimates, seems ridiculous for the most part.
If you read analyst reports and short arguments, the large red flag they wave is that of competition, and rightly so. When pointing at Audible valuation, they mostly neglect Audible's patents and foreign partnerships and exclusive licenses and software/hardware integration with a spectrum of devices and point to (1) the current audiobook market size and (2) the potential of a big competitor. But for some reason, when management forcefully addresses these concerns through a variety of initiatives, many people have tunnel vision for one set of numbers, the earnings metric, regardless of its suitability in this case. As I said before, if they thought this was Microsoft, they were mistaken and I, among others, will be happy to buy their shares. Audible should not sit on their $62 million cash, including the $48 million they just raised. They should proactively construct more barriers before real competition arrives. If they can do it while still remaining profitable, more power to them.
And one other thing should be said about the constant use of current audiobook market size as a gauge for Audible valuation. To me, this is worse than judging the size of the DVD and video-on-demand markets based on VHS sales. I was not an audiobook fan before Audible. Almost all of the 20+ people I got to subscribe to Audible were not audiobook fans. When you also consider the initiatives Audible will roll out to new content sources (podcasters, bloggers, etc), it seems shortsighted to place a ceiling on Audible's market using mostly US audiobook sales. Other bloggers, like the Internet Stock Blog, are intrigued with the possibilities.
I've posted additional commentary in Growth, Misinformation, and Valuation: ADBL Part 2.
Comments are closed
4 Comments
good analysis....I believe yo by Parkite (2005-02-16)
Amazon would be a tough competitor by Bill (2005-02-16)
- Patents. Hate to keep beating this drum, particularly since there are ways around and it cost $$ to litigate, but Audible has early patents that broadly cover DRM-style audio players tethered to computers. I'll probably post on this sometime.
- Exclusive licenses for a majority of content partners. My feeling -- and I'm not sure of Netflix's licenses -- is that Netflix has only locked in niche DVD providers, if any, and that no big studio would lock out Blockbuster, Hollywood, etc. Audible, on the other hand, has no competitor in the digital world and there are no audioboook-centric competitors in the physical world that measure up to Blockbuster and other Netflix competitors. This might be why Audible has been able to get exclusive licenses.
- Ten year head-start on this niche and delivery system. Bezos and his team are really sharp, but they have not been in the audiobook space whereas Netflix competitors have lived and breathed in the movie space longer than Netflix. Bezos would have to partner with a platform provider because Amazon has no internally developed DRM for audio players. Audible, particularly as they grow and capture more market, is being installed as a hardware feature. And it's not that easy to convert tens of thousands of hours of audio into multiple digital formats from a hodgepodge of source material.
I'm probably missing another difference or two, but I think Netflix will have more trouble than Audible simply because digital spoken word is a tougher problem. And tougher problems usually favor the small & agile.Audible competitive advantage by Anonymous (2005-02-22)
A speculative high-growth sto by Jonathan (2005-02-20)