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Andrew Kuhn July 12, 2018

LEAPS: The Joel Greenblatt Way to Bet on Entercom (ETM) and GameStop (GME)

Member Write-up by VETLE FORSLAND

Investing in companies with big upsides (and big downsides) with LEAPS, instead of common stock, to up your return (and minimize risk)

 

If you believe that a stock is excessively mispriced, and you want to buy that stock, there is a way for you to translate a say, 30% gain into a triple digit gain. It’s called LEAPS, or “Long-Term Equity Anticipation Securities”, and if used wisely, it is one the best ways to leverage your investment returns as a retail investor. Joel Greenblatt wrote about it in “You Can Be A Stock Market Genius”, where he described it as a tool that “has many of the risk/reward characteristics of an investment in the leveraged equity of a recapitalised company”. I recommend reading his bit on LEAPS, starting on page 213, as Greenblatt himself can show its pros and cons much better than I ever could. But, the strategy is basically buying stock options that expire 2 years down the road. Stock options are usually not attractive for long-term investors as they don’t allow sufficient time for a larger repricing, and are dependant on a short-term catalyst. However, as you can own LEAPS up till two years, chances are a stock that is severely and obviously mispriced will reach (or get close to) its fair value during your holding period.

 

Since, LEAPS are basically long-term options, how do options work? You can buy put options and call options, but in this case we will just look at calls, which is basically the right, but not the obligation, to buy a stock at a specified price within a specified time. For instance, let’s say you purchase a call option on shares of GameStop (GME) with a strike price of $16 and an expiration date of August 10th 2018. This option contract would give you the right to purchase 100 shares of GameStop at a price of $16 on August 10th, but as this right is only valuable if GameStop is trading above $16 on the expiration date, you risk expiring the option valueless. Right now, you can buy one call option on GameStop for August 10th for $0.50, which represents 100 underlying shares of stock, so the cost of a trade of 100 call options will be $5,000 (($0.50 x 100) x 100 shares. If by August 10th, GameStop trades at $17, the buyer could use the option to purchase those shares at $16, then immediately sell them for $17. Therefore, the option will sell for $1 on August 10th, and as each option represents 100 underlying shares, and our hypothetical trader bought 100 options, this will all total a sell price of $10,000. Because the trader bought this option for $5,000, the net profit equals $5,000 – comparably, a common stock buyer would have had to invested $160,000 to make the same profit from the same trade.

 

If, however, GameStop stock trades for $16.50 at the expiration date, …

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Geoff Gannon May 25, 2018

Gamestop (GME): A Risky Stock that Just Might be the Cheapest Billion Dollar Stock in Today’s Market

Member write-up by Vetle Forsland

 

Business Overview

GameStop is the number one video game retailer in the world, the largest AT&T retailer, the largest Apple products reseller and one of the world’s largest sellers of collectibles. The company had 7,276 stores as of February 3, 2018 all over the world, with over 5,200 of them in the US. They are also one of the world’s biggest buyers and sellers of used games. That means that people buy physical video games from a shop like GameStop, and when they are tired of playing the game, they can sell the game to GameStop at a discounted price. GameStop sells these games at a higher price, which allows gamers to buy used physical games at a big discount to new games. This segment makes up the largest proportion of GameStop’s gross profit, with 32% of all gross profits, but only 23% of sales, as a result of their terrific margins.

 

The video game segment of the brand had about 5,900 stores as of February this year, whereas 70% of these stores were located in the US. Most of these stores are GameStop-branded, but they also own store brands like EB Games, Micromania, ThinkGeek and Zing Pop Culture. Furthermore, they own Game Informer, which is the leading video game magazine in the world, and is actually the fourth most popular magazine in the world, with over 7 million monthly paid subscribers per month. It’s also the largest digital publication in the world.

 

GameStop’s “Technology Brands” contains 1,329 AT&T branded retail stores, where they sell AT&T services, DIRECTV service and electronic products. This segment also consists of 48 Simply Mac branded stores which sell and repair Apple products. Their technology brands make up 8.7% of sales and 19.5% of gross profits. It was a part of their attempt a couple of years ago to diversify away from the video game industry, and it has since been deemed unsuccessful as they recently wrote off about $360 million from the technology brands business. GameStop was pressed to decrease the equity value of the investment as they realized phone owners won’t switch models as frequently as in the past, which makes sense; newer phones aren’t evolving as drastically in quality as they used to.

 

The consensus today is that GameStop’s business – a video game retailer – is redundant in an age of online shopping. GameStop’s flagship “products” have always been hardware like the newest consoles and physical video games. However, PC Gamers have almost exclusively stopped buying physical video games, as only 20% of all PC games were sold in physical form last year. GameStop shareholders fear that the same will happen to console games and consoles. These two segments, if we include their used games segment, made up 57% of gross profit in 2017. So, I guess in an absolute worst case scenario, where all console gamers switch to digital, GameStop will lose around 60% of their value. The stock has fallen 80% …

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Geoff Gannon May 15, 2018

Box (BOX): Negative Earnings and Free Cash Flow Disguise Beautiful Customer Economics

Member write-up by Jayden Preston

 

Overview

 

Founded in 2005, Box offers a cloud content management platform, as a subscription-based service, that enables organizations of all sizes to securely manage and access files from anywhere, on any device. The company initially offered a free version in hopes of growing their user base rapidly, leading them to surpass 1 million registered users by July 2007. The Company realized that their users started bringing their solutions into the workplace and businesses were eager for a solution to empower user-friendly content sharing and collaboration in a secure, manageable way. In 2007, Box then made the strategic decision to focus more on the enterprise market by investing heavily to enhance the security of their platform and building an enterprise sales team. In 2012, Box introduced Box OneCloud platform and Box Embed framework to encourage developers and independent software vendors to build applications that connect to Box, creating an ecosystem of applications. The Company has also formed alliances with numerous software companies, bringing about more than 1,400 integrations with offerings from Google, Office 365, IBM and so on. This continual evolution of their platform features allowed the Company to sell into increasingly larger organizations.

 

Today, Box has a user base of over 58 million users. As of January 31, 2018, over 17% of their registered users, or close to 10 million, were paying users who registered as part of a larger enterprise or business account or by using a paid personal account. The Company has over 82,000 paying corporates. Around 70% of the Fortune 500 companies are their clients. In FY2018, Box generated $506 million in revenue, in which 96% is recurring.

 

Durability and Moat

 

With cloud content management business being the newer technology and current disrupter, it is difficult to see what would come and disrupt this business in the next decade or two.

 

The value proposition of cloud content management should be strong. Not only does the cloud allow for higher flexibility in accessing content and collaboration among colleagues, it also helps corporates cut costs through streamlining the content management process. Increasingly, through more integrations with other software offerings, the value proposition of cloud content management should only increase.

 

Complementing the above is Box’s strategic focus on the enterprise market. During the sales process of convincing a large enterprise to sign up as a client, Box often finds the need to tailor its offerings to the needs of the enterprise. This should increase the switching costs for the users. It is quite expensive to acquire such customers. For instance, by the end of FY2017, Box had 71,000 customers, covering 64% of the Fortune 500. The Company spent $303 million on sales and marketing in FY2018, during which the number of corporate customers increased by around 12,840. (Here I assume FY2017 year-end number of customers decreased by 4%. The difference between this number and the FY2018 year-end figure should equal to the number of new customers added) Assuming …

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