KeyStone’s Stock Talk Show, Episode 174
I am back this week from a Scottish Vacation which included Castles, Steak Pie, Castles, Haggis, Castles, a Royal Yacht, Castles, some beautiful scenery, and more Castles…it was good times. We kick of this week’s show with a brief discussion on the U.S. Federal Reserve’s annual meeting in Jackson’s Hole, Brennan will look at some meme’s around the financial term EBITDA and I will remind him how BC crushed Saskatchewan (CFL) once again this past week. In our Your Stock, Our Take segment I will take a look at Canadian-based point-of-sale payments processor Lightspeed Commerce Inc. (LSPD:TSX). The former market darling is down 50% year to-date and 84% from this past September. A listener asks if the stock finally offers value. Brennan will continue our series on legendary or famous investors series with a look into Kevin O’Leary, the outspoken Canadian investor’s of Dragon’s Den and Shark Tank fame who recently stated that about 25% of his portfolio is tied up in Cryptocurrencies. We also take a quick look at O’Leary backed publicly listed WonderFi Technologies Inc. (WNDR:TSX). Finally, Brett takes a look at a bit of a late August resurgence in meme stocks. Names including Gamestop, AMC Theatres and most recently Bed Bath and Beyond have been in play once again over the past week to both the upside and downside. Brett will keep you up to date.
Welcome, my cohosts, Brennan, and Brett! Aaron remains behind somewhere in the UK.
Jackson Hole – Why The Fed is in Wyoming
Later this week, from the 25- 27th to be exact, the US Fed or Federal Reserve holds a small gathering of around 120 of the world’s leading economists and policymakers Jackson Hole, Wyoming.
What is it?
While only 120 people attend the event every year, the publicly-released papers and speeches — as well as media engagements by policymakers — have made the Kansas City Fed’s Economic Policy Symposium a landmark event for Fed watchers and investors tuned in from afar.
Why held in Jacksons Hole?
It is one of the most popular ski destinations in the U.S., which does not hurt, but, the reason this annual Fed meeting landing the 48-mile-long valley has to do with the fishing in them there parts.
A fishy rumour of sorts has it that organizers back in 1982 were trying to get then Fed Chairman, Paul Volcker to attend to raise the profile of the event. Knowing his fondness for fly-fishing, the event was set up in Jackson’s Hole, in late August which provided the perfect conditions for reeling in both Volker and his prised trout. The rest is history.
What has been discussed in the past?
Past topics of consideration at the conference include the impact of tech giants like Meta (formerly Facebook), Amazon, Apple, and Google on big companies (2018) and financial stability in the wake of a global recession (2016).
What is on the agenda for this year?
It will be the first in-person gathering of the summer camp for economic gurus since 2019, with the signature event being a speech by Fed Chairman Jerome Powell on Friday, the same day the government releases a key inflation measure for July.
Many believe Fed Chair, Jerome Powell will speak directly to investors (the markets). If you recall in their July meeting the Fed raised rates a substantial 75 basis points, but the stock market actually rallied and bond yield went down, which is not likely what the Fed wants. There are several analysts that expect that because the markets took the Chairmain’s July statements as Dovish (interest rates go lower again longer term), he will likely take a Hawkish or inflation fighting tone to keep up the perception or reality that the Fed will continue to increase rates until it believes inflation is under control and in its stated range.
In addition to Powell’s remarks, there will be readings on the state of the service sector, now growing more important to analysts as consumers switch their buying habits from goods to services. Friday will bring another take on consumer sentiment from the University of Michigan, a key element but one that has proven to be somewhat detached from actual consumer behavior of late. And more housing data is on tap following several negative reports that have the National Association of Home Builders proclaiming the housing sector has fallen into recession. We will take a look at the headlines next week.
EBITDA?
I came across a couple of Finance Memes that I got a kick out of on the weekend and for people who are just listening I will do my best to describe the images for you.
The first one is an image of a frying pan on the left-hand side full with Spinach and the word EBITDA above it. And then next to it on the right, there is an image of the same frying pan with just a few pieces of spinach that have been cooked down with the words Net Income above it.
So, the gist of the meme is that EBITDA or Earnings Before Interest Tax Depreciation and Amortization – which is sometimes seen as a proxy for cash flow…. Depending on who you are talking to… – ends up being just a few dollars (or pieces of spinach in this case) when we finally get down to the bottom line which is net income. Now personally I thought it was funny because as the guys know – I eat eggs every day. And recently I started frying up spinach for my omelettes and my mind was blown with how a huge pile of spinach could cook down too what appears to be just a few pieces.
The second meme is an image for the golf lovers out there and is of Tiger Woods standing next to John Daily. With the words GAAP Net Income above Tiger, and over John Daily there are the words Pro-forma Adjusted Last Quarter Annualized Run-Rate EBITDA…. Which is a very sketchy way of annualizing the profitability of a company. And if used to value a company or assess its net-debt to EBITDA… we could come away with some multiples that look much better than they would realistically be.
Now the reason I bring these memes up is it facilitates the question – can we rely on Adjusted EBITDA? We would of course say it depends – As you must take the time to consider what management is doing to adjust its earnings to get to that figure.
And I will end this quick segment with a quote from Warren Buffett.
Warren Buffett – “It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it. Charlie and I want managements, in their commentary, to describe unusual items–good or bad–that affect the GAAP numbers. After all, the reason we look at these numbers of the past is to make estimates of the future. But a management that regularly attempts to wave away very real costs by highlighting ‘adjusted per-share earnings’ makes us nervous.”
YSOT
Lightspeed Commerce Inc. (LSPD:TSX)
Price: $25.18
Market Cap: $3.74 Billion.
Company Description:
Lightspeed is a point-of-sale (POS) platform solutions provider for small & medium sized enterprises (SMEs) in the retail and restaurant industries. Lightspeed provides an end-to-end solution that integrates front-end software, back-end software, and payments.
The former market darling is down 50% year to-date and 84% from this past September.
We last reviewed Lightspeed in this segment when it traded at $117 in August of 2021 – fundamentally it traded at roughly 55 times EV to sales on a trailing basis and 23 times forward expected sales with no earnings, cash flow or even adjusted EBITDA. The market cap was close to $20 billion. While revenue growth was great and the balance sheet was great – but the stock was grossly expensive and we said it did not meet our minimum criteria (no cash flow) – and investors should stay clear. Let’s see where the company is today.
As we stated, the share price has cratered.
Recent Financial Results:
Q1 Fiscal 2022
First Quarter Financial Highlights
(All comparisons are relative to the three-month period ended June 30, 2021 unless otherwise stated):
- Revenue rose 50% to $173.9 million.
- Net loss of ($100.8) million compared to ($49.3) million.
- After adjusting for certain items such as acquisition-related costs and share-based compensation, Adjusted Loss was ($17.6) million.
- Adjusted EBITDA loss of ($15.6) million, representing (9.0)% of revenue.
- As at June 30, 2022, Lightspeed had ~$915 million in unrestricted cash and cash equivalents.
Strong Growth in Revenues – not even a sniff of operating income historically.
CONCLUSION
With Lightspeed’s share down roughly 85% from its September highs it now trades at 4.2x EV to trailing sales 3.1x its expected Fiscal 2023 sales. While the company had targeted EBITDA margins in the range of 20%, current margins are still negative.
Analyst expectations are for breakeven adjusted EBITDA in Q1 Fiscal 2024 – so in roughly two quarters. This is positive (if achieved) but from a valuation basis, we are not talking real cash flow and certainly nothing close to actualearnings per share. Philosophically, we find it poor investment practice to buy businesses on the promise of future earnings if the management team has never operated the business from a cash flow positive position, particularly if one of the primary drivers of growth has been acquisitions. The balance sheet is great and M&A activity can add to growth, but based on current and even next year’s expected numbers, the stock continues to remain expensive or, at the very least, hold a higher level of risk than we are comfortable with.
Kevin O’Leary
Kevin O’Leary made the biggest deal of his life when he sold The Learning Company to Mattel at the height of the dot-com bubble in 1999 for $4.2 billion.
Since then, he’s become a venture capitalist, mutual fund manager, and television personality, currently best known as one of the investors on “Shark Tank.”
He’s a self-made millionaire whose career has taken him through many different industries. He’s seen enough to pin down five different “languages of money” that he details in his book “Cold Hard Truth on Family, Kids and Money.”
You’ll find that these languages, these ways of seeing money, manifest themselves in ways that significantly define someone’s personality and therefore the type of relationships they maintain.
See how you and the people you know measure up, and make any necessary adjustments before it’s too late!
I like Kevin O’Leary – find him entertaining and I agree with the theme of being a slave to cash flow in investing.
It is interesting to point out, that the one deal that established his fortune – the sale of his family business, The Learning Company to Mattel $4.2 billion was done at the height of the dot-com bubble, a time when investor’s completely forget the words cash flow. He made a great deal. Since then he has preached the importance of investing in cash flowing business as a basic minimum criteria – a concrete tangible tenant of his investment philosophy. But to now be talking about having 25% of his portfolio in crypto based on the idea that “the smartest people in his mind in the world” all want to work in crypto and eschewing cash flow, is at the very least curious.
WonderFi Technologies Inc. (WNDR:TSX)
O’Leary backed publicly listed WonderFi Technologies Inc. (WNDR:TSX) which has been listed for around a year and began trading at roughly the $1.70 range, hitting highs of just under $3.00 in the 2021 tech bubble, but have plummeted to the $0.44 range. While WonderFi posted revenues of $2.9 million in last quarter, the operating loss was $10.4 million, and the company was nowhere near cash flow positive.
Investor Spotlight – Kevin O’Leary
Kevin O’Leary is a Canadian businessman, investor, and television personality – appearing on shows like the Dragons’ Den and Shark Tank where he is a private equity investor.
- O’Leary’s first claim to fame and millions were earned when he co-founded SoftKey Software Products, a technology company that was acquired by Mattel in 1999.
- In 2008, O’Leary co-founded O’Leary Funds Inc., a mutual fund company.
Despite many people’s criticism of O’Leary’s brash and sometimes rude demeanor on television – often telling entrepreneurs to take their bad business idea “behind the barn and shoot it”… I have always enjoyed his honesty and discipline to cash flow. O’Leary has even stated “My whole investment strategy is built around cash flow. I have a little Charlie Munger on my shoulder every day when I look at a deal, and he’s just saying two words: ‘cash flow, cash flow.’”
Now the reason I wanted to discuss O’Leary in our investment spotlight segment is because I listened to him on a couple of podcasts recently where he stated that about 25% of his portfolio is tied up in Cryptocurrencies… and I thought how peculiar considering his discipline towards cash flowwwww. Of course, no one is auditing his portfolio so we do not know the actually amount of his holdings in crypto, but he has publicly disclosed this summer that he has 32 positions in altcoins including:
- Polygon – a scaling platform to make Ethereum more efficient. (to handle more transactions)
- HBAR – a ledger which is an alternative to blockchain.
- Solana
- Serum
- Helium
To name a few…
As well as Vancouver Based company – WonderFi Technologies (WNDR:TSX) which offers a technology platform allowing people to invest in digital assets, including crypto and NFTs. And just a note – Wonderfi had an operating loss of $30 million during the first 9 months of fiscal 2022, but they did just recently make a sizeable acquisition.
Now the reason for O’Leary’s exposure to crypto is that he says – “I believe [crypto] is going to become the 12th sector of the economy at some point. It’s going to take 10 years or whatever, but I look at it and say to myself it’s all software innovation. Bitcoin is not a coin, it’s software. And at this point, I really start to think about this as financial services productivity so in a way I’m doing a lot of private equity in it.”
Now I agree with O’Leary’s comments that crypto is essentially software… but he is making big bets on crypto which is potentially outside of his typical investing philosophy which revolves around cash flow.
In the words of Kevin – “If a business or idea is not making money after 36 months you have to take it behind the barn and shoot it… It was put on your Journey to teach you what not to do”
Will O’Leary’s bets in the crypto world payoff?? Possibly. But if some of these investments do not I think that his dreams will be plagued with Charlie Munger reciting the words — “Cash Flow, Cash Flow, Cash Flow”….
