There’s a certain glee I admit to reveling in when I make a great call. I don’t do it very often because, let’s face it, nobody likes a gloater. In one case, I can’t say I’m gleeful so much as shaking my head at the stupidity of Priceline Group Inc (NASDAQ:PCLN).
Back in June of 2014, when PCLN purchased online restaurant reservation service OpenTable for $2.6 billion in cash, I wrote, “This is a dumb move.”
I pointed out that PCLN paid 78 times earnings for OpenTable’s whopping $33.4 million in FY13 net income. I said there was absolutely no synergy in this foolish purchase, and it was simply because management saw another online company purchase a European restaurant reservation service.
I was right. I was so very right. PCLN admitted it, as it wrote off $941 million of that investment. It has also plowed capital into trying to expand OpenTable beyond the U.S., something I also said would never work.
So, what online company gets the next insanely overpriced buyout and should you even speculate on such a thing as an investor?
The Usual Suspects
The potential suitors are always going to be the same: Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), Tripadvisor Inc (NASDAQ:TRIP) and Expedia Inc (NASDAQ:EXPE). PCLN has probably learned its lesson.
I think Yelp Inc (NASDAQ:YELP) is going to be high on some idiot CEO’s list. The one thing Yelp has that is of value is a large-scale local advertising base. Small businesses can get the word out to local patrons via Yelp, and of course, also take on the risk of being rated. Of course, if they have a good rating response protocol, then all should be well.
But the TTM loss was $35 million. Yelp has been around more than ten years and still can’t make money. That means some suitor will definitely buy it! It presently has a $2.77 billion market cap. With TTM revenue of $672 million, and the OpenTable purchase valued at 13 times revenue, that means a buyout price of $8.7 billion, right?
Not so fast.
Surely, any potential suitor will learn from the PCLN fiasco, and maybe only pay half that amount, or $4.7 billion. Do I really think YELP could go out at a 45% premium from its current $35 stock price? No. But there’s a sucker born every minute.
What might happen to GrubHub Inc (NASDAQ:GRUB)? Let’s see, it’s an online food delivery order service, a concept rapidly becoming commoditized with $47 million in TTM net income. It actually makes a profit and it’s $3.2 billion market cap makes it trade at a P/E ratio of about 70. So thankfully, it already appears to be overpriced.
In fact, when PCLN stock took out OpenTable at a P/E ratio of 78, there may only be a 10% premium left in Grubhub! Gasp! Better avoid this one.
Okay, I know everybody wants to ask about Twitter Inc (NASDAQ:TWTR). After this year’s debacle where everybody was certain TWTR was going to be bought out — Twitter stock soared and a bunch of people lost money when the buyout failed — it should only be a year or so before the rumor mill starts up again.
Listen closely: Twitter loses money. A lot of money. In the TTM its lost $380 million. This happens despite its alleged 317 million monthly active users. Yet it is actually cash flow positive from an operating standpoint, and does have free cash flow of over $400 million. Despite this, and its $3.5 billion in cash, nobody wants to touch it.
If those users are real, then they generate about $8 per person in revenue for the company. The only buyout that occurs is if a suitor can generate eight to 10 times that amount. Not gonna happen.
Then again, Priceline stock has soared about 40% since the OpenTable buyout. So what do I know?
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he is short WRLD and holds puts. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
