In 2006, Jack Dorsey, Evan Williams, Biz Stone, and Noah Glass, created the news and social networking site, Twitter. Since its IPO in September, 2013, Twitter (TWTR) stock has seen its fair share of highs and lows. But where is Twitter headed next? Is it an undervalued stock or an overvalued stock?

Twitter P/E Ratio

The PE Ratio for Twitter is elevated suggesting that, over the long term, the share price will normalize to reflect the lower general market’s PE ratio, or the earnings will increase to come in line more with the broader stock market’s PE ratio.

The P/E Ratio for the stock market long-term has averaged about 16x, which means the general market trades at a price of about 16 times its earnings. A simple way to think about P/E ratio is to take its reciprocal and turn it into a percentage. This translates the less intuitive P/E ratio to an intuitive annual yield. For example, if the average P/E of the market is 16x then 1/16th equates to an annual yield of 6.25%. Obviously it depends on the time frame when the comparison is made but this gives you a rough estimate.

A company trading with a P/E ratio higher than the market can continue trading with an elevated P/E ratio for an extended time period. But eventually either the earnings must grow to normalize with the general market’s P/E or the share price will fall. For Twitter, an elevated P/E ratio above market norms suggests that the earnings for Twitter must grow over time otherwise the share price is in jeopardy of declining.

The likelihood of earnings per share increasing over time is predicated on either lower expenses at Twitter Inc or higher revenues, which are preferred. If revenues are increasing, and costs don’t increase at the same pace, TWTR earnings are likely to grow over time.

Sometimes, revenue growth can be augmented when a company takes on debt capital. But the debt comes at a cost of ongoing interest and principal charges. Still, changes to the capital structure resulting from debt can boost returns.

A company with excessive debt should be approached with caution while a Debt to Total Capital ratio of zero can be a positive indicator for the company’s long term financial health.

Twitter ROIC

Return on Invested Capital, or ROIC, is a measure of the potential a company has to create value after factoring in the initial capital invested. ROIC is perhaps the most important measure that value investors focus upon when examining a company.

Another popular valuation metric used to measure the value of a company is EV/EBITDA. It is frequently used as a replacement for P/E ratio or sometimes in combination with it to determine the fair market value of a company.

Twitter Fair Value Estimate

Examining other valuation multiples for Twitter provides a summary fair value estimate. These multiples  include:

• 5 year DCF Growth Exit
• 5 year DCF EBITDA Exit
• 5 year DCF Revenue Exit
• EBITDA Multiples
• Revenue Multiples
• 10 year DCF Growth Exit
• 10 year DCF EBITDA Exit
• 10 year DCF Revenue Exit
• Earnings Power Value

The average of these models is shown in the Fair Value estimate below:

Based on these models, a fair value estimate for Twitter is displayed to show how far away the share price is from the valuation projection based on the models.

Twitter WACC

For value aficionados, the weighted average cost of capital, or WACC, selected beta, cost of equity and tax rate for Twitter are displayed in a summary card below:

The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.

Have you bought Twitter stock? Share with us your trading experiences with Twitter in the comments below. We would love to hear from you.

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The article How Do I Buy Stock In Twitter? was originally posted on Investormint

Most investors think of Amazon as an online retailer with low margins and a high price-to-earnings ratio. But Amazon is so much more than an online shopping destination. These days Amazon is a goliath in not only retail but also in cloud computing, logistics, consumer technology, and media and entertainment.

Amazon AWS, its cloud business, generates scintillating margins. Its Echo device and Alexa AI assistant has been a huge hit with consumers. Approximately 1 in 2 U.S. households has a Prime membership. And some Wall Street analysts project Amazon will mushroom higher at an astonishing 16% compounded annual growth rate thru 2025.

In spite of the lofty projections, Amazon has had its fair share of flops in the past. Famously, its Fire phone fizzled out and it has lost tens of millions by investing in failed startups like Kozmo.com. But overall the company has thrived to make Jeff Bezos the richest man in the world (depending on what day you look) and continues to disrupt a wide variety of industries from book publishing to grocery stores.

So is Amazon stock worth buying or is time to sell, sell, sell?

Amazon Stock Price & Valuation

To assess the merits of buying Amazon stock, we can crunch valuation figures and analyze its corporate strategy using quantitative and qualitative research. 

QUANTITATIVE RESEARCH

Amazon is a notoriously difficult company to value because it defies conventional wisdom by keep margins razor thin, especially in its online retail segment.

These low margins result in dizzyingly high price-to-earnings ratios. Nevertheless, we can apply six valuation models to estimate the current value of the company, including:

• 5Y DCF Growth Exit
• 10Y DCF Growth Exit
• 10Y DCF Revenue Exit
• EBITDA Multiples
• Revenue Multiples
• 5Y DCF Revenue Exit

Generally, what we find is the longer term ten year forecasts lead to higher share price projections compared to shorter term 5-year estimates.

And it’s no surprise that EBITDA and revenue multiple calculations for Amazon lead to share price estimate that are approximately half of what the discounted cash flow forecast models project.

Below, you can compare Wall Street analysts’ consensus share price estimates with the estimate arrived at using theoretical valuation models.

QUALITATIVE RESEARCH

Amazon has not only succeeded in growing organically but it has acquired other businesses strategically when it finds a “dreamy business” in the words of Jeff Bezos:

“A dreamy business offering has at least four characteristics. Customers love it, it can grow to a very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades”
~Jeff Bezos

Some of Amazon’s largest deals include:

Amazon’s acquisitions are not limited to the U.S. It snapped up Souq, the “Amazon of the Middle East”, in 2017 for between $650M → $750M. This acquisition opens up Amazon to markets in Saudi Arabia, Egypt, and the United Arab Emirates.

More recently, acquisitions have been in a key growth business for Amazon. The margins in Amazon’s cloud computing AWS service have astonished investors, so it is no surprise to see the company continue to invest heavily there with in order to further boost its product offering:

Acquisitions will clearly play a big part in Amazon’s future growth strategy following the launch of its Alexa Fund which has a war chest of $100M and a laser focus on companies related to the internet-of-things and voice technology.

It’s notable that rival tech leader Alphabet invests much more aggressively in a wide variety of companies while Apple shies away from acquisitions unless it can own a company outright – similar to Facebook’s acquisition strategy (e.g. WhatsApp and Instagram).

Source: CBInsights

You can clearly see where Amazon expects future growth to come from when it comes to its Alexa Fund acquisitions: instructing devices to respond to your voice commands.

Some acquisitions it has made to enhance the Alexa ecosystem include:

AMAZON HEALTHCARE

Perhaps the scariest prospect for companies is the idea of Amazon entering its market.

Until Amazon purchased Whole Foods, the idea of it becoming a heavyweight in the grocery industry might have seemed far-fetched.

And until Amazon launched Prime Video, the thought of it competing with Netflix to stream entertainment content and produce original shows seemed hard to imagine.

But Amazon has a knack for shocking incumbents with bold moves, and one burgeoning opportunity is in the healthcare industry.

Amazon invested in biotech start-up GRAIL, which concentrates on genomics for cancer diagnosis.

A gene sequencer called Illumina has already spun out from GRAIL and complements Amazon’s AWS well because of the computing power needed for genomic sequencing.

AMAZON DRONES

Among Amazon’s most ambitious bets for the future is its investment in drone delivery technology.

Whether Amazon is leading investors on a wild goose chase, there is no denying the patent it applied for regarding an airborne fulfillment center:

Other adventurous bets can be seen from patent applications that span a wide gamut of areas from “virtual machines” to “unmanned vehicles”, and even to “cryptographic keys.”

It’s unclear whether Amazon plans to take payment from cryptocurrencies in the future, but what cannot be denied is that it has already purchased domain names such as:

• AmazonBitcoin.com
• AmazonEthereum.com
• AmazonCryptocurrency.com
• AmazonCryptocurrencies.com

Perhaps Amazon is simply protecting its brand name from trolls or maybe it’s a sign of greater ambitions to take cryptocurrency payments in coming years.

Amazon Stock Price History

Amazon’s share price has soared since it went public with gains of 35,000% over a couple of decades, but what is next?

Amazon stock is notoriously volatile. Because the company spreads its wings so far by attacking a diverse group of industries, it has its share of hits and misses, causing both euphoria and dismay among investors.

While Amazon’s share price has historically been choppy, Jeff Bezos has argued that his company pays close attention to what will remain constant over time as much as it focuses on new opportunities:

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one.

I almost never get the question: ‘What’s not going to change in the next 10 years?’

And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time.

… in our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery, they want vast selection.

It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible.” ~ Jeff Bezos

If you look over a ten year period, you will see wild swings in share price, but perhaps investors can derive some comfort knowing some things will remain constant: low prices, fast delivery, and vast product selection.

Even if you were to examine Amazon stock over any one year period, you would see a share price that has had its fair share of volatility, a representation of the struggle investors experience when attempting to accurately value a company with so many moving parts.

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Crunching The Numbers:
Amazon Revenues & Earnings

As an online retailer, Amazon was famous for delivering low earnings figures quarter after quarter but thanks to its cloud computing division, margins look better.

When Amazon started out in 1995, Jeff Bezos raised almost $1,000,000 from a handful of early investors.

Just one year later, Bezos sold a 13% stake to Kleiner Perkins Caufield & Byers for $8 million, which valued Amazon at $60 million.

And a year after that Amazon went public at a valuation of $381 million. In the next few decades, Amazon stock skyrocketed 35,000%, not least because of stunning revenue growth.

Total historical revenue growth across its entire business operations has been phenomenal over time.

When revenues grow so quickly it sometimes takes time for earnings to catch up. But as an online retailer, earnings never really have caught up to revenues, causing investors to scratch their heads as to how best to value a company growing so fast yet not turning much of a profit.

These days, Amazon AWS delivers such high margins that the company as a whole is likely to experience earnings grow at a rapid pace over the next decade – unless Bezos deploys profits back into new ventures.

Amazon Return On Invested Capital (ROIC)

When you take into account the amount of capital invested, ROIC measures the profitability and value-creating potential of Amazon.

Great companies sustain value creation over time and that is demonstrated through high returns on invested capital.

You can think of return on invested capital, or ROIC, as a gauge of whether the company is generating a return for its shareholders and bondholders.

Amazon’s ROIC is slightly lower than investors might expect given the extraordinary value creation reflected in its market capitalization. But it’s not really a surprise to see that just as Amazon confounds investors when it comes to earnings so too does it challenge investors when it comes to ROIC.

Because Amazon invests so heavily, it is no surprise to see that the returns to-date on those investments are lower than investors might wish.

Investors will just have to wait and see whether Amazon can turn its investments into higher returns on capital in the decades to come.

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Amazon Debt To Total Capital

Amazon has comparatively low debt levels but Amazon’s core business as an online retailer may suffer in terms of revenues during tough economic periods.

Unlike debt-laden companies that increasing struggle when interest rates rise following a Fed rate hike, Amazon has very little debt overall and should face no real hurdles from its financial obligations during higher interest rate environments.

However, Amazon reaches approximately 1 in every 2 U.S. households, who are on the whole heavily indebted, and so the likelihood is they will need to tighten spending during periods of economic recession, and this in turn may affect Amazon’s revenues.

Amazon WACC

Weighted average cost of capital, or WACC, is a measure of how much it costs a company to raise capital from its stakeholders.

Shareholders and bondholders demand a yield, and the combined return is captured in the Amazon WACC.

Imagine for a moment that Amazon needed to raise $1 billion from its shareholders and bondholders, 50% from each.

If lenders expected a 4% return and shareholders demanded a 10% return, the WACC would be 7%. So, Amazon would need to generate at least a 7% return to keep both debt and equity holders happy.

The Amazon WACC is shown below:

Amazon Financials

Amazon’s financials featuring a 5 year DCF Revenue Exit model is shown below:

Have you invested in Amazon stock? Share your investing tips below:

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The article How Do I Buy Stock In Amazon? was originally posted on Investormint

Uber stock may not be traded publicly yet but that doesn’t mean you can’t own a piece of the ridesharing app.

Historically, it was only possible to invest in private companies like Uber before their Initial Public Offerings (IPOs) if you were an institutional investor or a high net worth private client.

But what if you are an ordinary Joe or Jane investor wanting to own shares of the ridesharing app that has innovated in the formerly stodgy industry of ground transportation? How do you get a piece of the pie?

As it turns out, a lot of investment avenues are open to prospective Uber investors but first you should have clear reasons why you want to invest in Uber.

Why Invest In Uber Stock?

Like any company you invest in, you should have an investment thesis about why you want to exchange your hard-earned money for shares of stock. The best investors in the world have conviction in a thesis, meaning when the investment horizon sours you still have faith in your investment.

If you owned shares of Facebook, your investment thesis may be based on the network effect whereby the community of users are highly engaged with the platform and even those who want to leave are often drawn back because their friends are still on the social networking site.

Alphabet shareholders may buy into an investment thesis that Google holds a dominant market share position in the search industry which makes it nearly impossible for a competitor to dislodge them from their perch.

And Amazon stock owners might have conviction knowing that the company has acquired almost 1 in every 2 American households as Prime members and has been responsible for putting many brand name retailers out of business thanks to perceived low cost goods and services, and fast delivery times.

But why invest in Uber stock? Like Facebook, Uber enjoys a network effect advantage. It has a marketplace business that features both riders and drivers. When more drivers are on the platform and more riders hail vehicles, Uber can commoditize transportation prices in any given city.

If Uber launched in a city with nine other competitors, the other ridesharing companies would likely charge different prices and it would be difficult to build a dominant market share position and a brand name.

Beyond a simple investment thesis, you should have deeper insight into Uber financials to see how the company is growing revenues and cash, how much it is spending, and how much it is generating in profits or losses.

Uber Financials:
Income Statement

Although Uber is not required to disclose its financial records as a privately held company, the Wall Street Journal did get a hold of and report on its quarterly statements.

Gross bookings for Uber are the sum of its trips before Uber takes its cut. When gross bookings increase it means overall demand for rides as well as freight and food deliveries are on the rise. During the second and third quarters of 2017, Uber grew bookings by 11% compared to 17% in the first and second periods.

After paying its drivers, Uber keeps its share of revenues, which are called net revenues. The growth rate in net revenues during the same period last year was 21%, which is higher than the growth in bookings. The reason Uber grew net revenues faster than gross bookings is because it reduced incentive payments to drivers, which it calls net partner earnings.

During the third quarter in 2017, Uber grew quarterly revenues to $2 billion for the first time. By comparison, it took Facebook nine years to cross this threshold when it was growing quarterly revenues at a pace of 11%.

Source: Wall Street Journal

But revenue growth alone is not sufficient to make a company successful. While Uber has prioritized growth globally in order to establish a market share in cities worldwide and prevent competitors from gaining traction, it needs to earn a profit in the foreseeable future or risk further eroding its cash reserves.

As a company that commoditizes prices in its industry, Uber constantly faces price wars in the cities in which it operates. Facing battles with competitors, like Lyft and Didi Chuxing, Uber has sacrificed earnings for growth and lost a whopping $1 billion in the third quarter of 2017.

Uber Funding Rounds

Uber has issued a lot of equity to investors. From its first seed round in 2009 financed by former CEO, Travis Kalanick, and co-founder, Garrett Camp, Uber has raised billions of dollars from top tier investors, including Goldman Sachs, Morgan Stanley, SoftBank, Benchmark, First Round Capital, Fidelity Investments, Baidu, Tata Capital, and Glade Brook Capital Partners.

Source: Crunchbase

Uber Financials:
Balance Sheet

By issuing so much equity and debt to investors, Uber has raised substantial cash reserves despite burning through a lot of cash at a fast rate to finance operations, marketing and growth.

Nevertheless, it is clear from one quarter to the next, cash is shrinking. But Uber isn’t burning cash as fast as net losses might suggest at first glance.

Although net losses in the third quarter of 2017 eclipsed $1 billion, free cash flow was negative to the tune of $585 million.

Source: Wall Street Journal

Excluding the most recent investment from SoftBank, Uber would not burn through its existing cash reserves for another 4 years.

The key reason net losses and free cash flow look so different is that the latter is defined as operating cash flow minus both capital expenditures and the cost of leased vehicles.

Source: Wall Street Journal

Uber Financials:
What You Need To Know

It is easy to gloss over the many numbers on Uber’s financial statements but a few numbers stand out that are worth paying close attention to before investing.

Gross profit in the third quarter was $865 million while total operating expenses were approximately $2 billion, so Uber has a shortfall of approximately $1.1 billion to reach breakeven.

Marketing costs were $572 million and research & development costs were $314 million, so even if you stripped both of those expenses out of the income statement, there is still a leap to reach the breakeven mark.

But naysayers should be wary of getting too bearish on Uber because SoftBank invested a whopping $7 billion at the end of 2017 in exchange for approximately a 15% stake in Uber.

The vast majority of the capital is used to buy out existing shareholders while an additional $1.25 billion in new capital was added.

It is noteworthy that the valuation at which SoftBank invested was significantly lower than the valuation in the prior funding round. For optimistic investors however the discounted valuation of $48 billion might be an attractive entry level for a long-term investment opportunity.

So how can you invest in Uber stock?

Invest In Uber Stock Indirectly

One of the ways to invest in Uber stock is to purchase shares in a company that has already invested in Uber. Alphabet, Inc., better known as Google, has invested as has Microsoft, so you could buy shares in those technology companies as a proxy approach.

When Uber goes public, the shares of Uber owned by the tech giants will be added to their respective balance sheets.

This indirect approach is not necessarily going to be the best way to invest in Uber stock however because both Alphabet and Microsoft are gigantic companies and the fate of Uber won’t make or break their respective share prices.

So what other ways to invest in Uber exist?

Invest In Uber Competitors

For investors who are pessimistic about the prospect of Uber succeeding, it is possible to invest in its competitors.

Although Lyft, its primary U.S. competitor, is pre-IPO too, Medallion Financial Corp [TAXI] is a company that loans money for taxicab medallions in New York and other major metropolitan areas in the United States.

As medallion prices plummeted due to the competitive pressure from Uber, dividend yields spiked for Medallion Financial Corporation, so you could potentially gain not only from an upside in share price but also from a handsome dividend payment.

On the other hand, if you are bullish on the upside potential for Uber, you could look to short stock or buy bearish put options.

Invest In a Private Equity Fund

Private equity funds and venture capital funds regularly invest in private companies that have high potential like Uber.

To become a client of a private equity fund or VC fund, you will need to be an accredited investor, which means as an individual you earn an annual income of $200,000 or more for two consecutive years or you have a net worth of $1 million excluding your primary residence. As a couple, the income threshold rises to $300,000 annually.

If you are among the lucky few who qualify as an accredited investor, check out the companies (in the Crunchbase Funding Rounds graphic above) who have invested in Uber. The next step is to call them up and enquire whether it is possible to purchase shares in Uber if you become a client.

Invest In Uber Via
Private Company Broker/Dealers

In the past when companies like Uber mushroomed to dizzyingly high valuations, insiders were historically unable to cash out.

But these days marketplaces exist where employees who acquire stock options grants or early investors can sell to interested buyers.

Sharespost is a broker/dealer as well as a fund for private company stocks that matches buyers and sellers. The company has historically enjoyed a good reputation as an intermediary for both sellers and buyers.

Another company that enables private companies and investment funds to customize, control, and execute primary and secondary transactions is SecondMarket, now called NASDAQ Private Market after SecondMarket was acquired in 2015.

SecondMarket had been a registered broker/dealer and member of FINRA, MSRB, SIPC, and an SEC registered alternative trading system (ATS) for private company stock.

It also earned a solid reputation having been backed by top tier investors, including FirstMark Capital, The Social+Capital Partnership, Silicon Valley Bank, New Enterprise Associates (NEA), Li Ka-shing Foundation, and Temasek Holdings.

While Sharespost and NASDAQ Private Market are among the better known companies that facilitate private company trading markets, they have competition from Knight Capital Group, GFI Group, Liquidnet and Cantor Fitzgerald. So, if you run into an issue on one platform where you cannot buy shares, you can try any of the others.

What Are The Risks Of
Investing In Uber Stock?

The Queen of England famously described 1992 as “annus horribilis”, a horrible year, and the same could be said for Uber in 2017.

Betting on Uber may have seemed like a sure bet during its meteoric rise over the first years of its existence, but before committing capital to any investment, you should know the risks.

Uber has been dogged by negative press and scandals in recent years, so you should factor in the downside risk of betting on the company before parting with your hard-earned money.

In spite of the negative press, Uber financials show the company has continued to grow bookings and net revenues.

Following the resignation of former Uber CEO, Travis Kalanick, Dara Khosrowshahi took over as CEO of Uber. He was previously the CEO of Expedia, and the hopes are high among investors that he can instill a corporate culture that leaves the aforementioned scandals in the past.

So, if you want to invest in Uber stock, you should carefully weigh the risks and rewards, as well as the opportunity costs before parting with your hard-earned money.

Are you an Uber rider or driver? Would you invest in Uber stock if you could? Share your thoughts in the comments below, we would love to hear from you.

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The article How Do You Invest In Uber Stock? was originally posted on Investormint