ShmoopTube

00:00

Principles of finance ah la shmoop drones Yep that's still

00:05

you you've been hunting for lbo targets now for months

00:08

and months and months whole lot of nothing lots of

00:10

false starts many that died in the first hour of

00:13

research and a few where a competitive firm beat you

00:17

to the punch and bottom but thus far for your

00:20

fat salary plus notional bonus Well you're in pain realizing

00:24

that you've contributed absolutely nothing of tangible financial value to

00:29

the firm Nothing has materialized and you start to add

00:32

up the very high cost to the firm of having

00:34

you basically just surf around the web reading stuff Your

00:38

salary and benefits cost them almost twenty five grand a

00:41

month all told in the last six months while you

00:43

cost the firm almost one hundred fifty grand about your

00:46

reckoning and given them nothing back And you're wondering what

00:50

private equity washouts do for a living after they wash

00:53

out So when the day comes around and door number

00:56

three opens your in full contact focus like a light

00:59

through a capital it window Duff break the ticker b

01:02

r nd hits your screen You didn't need all that

01:05

College to immediately recognize that it's a totally cool company

01:09

they make basically two flavors of drones big and little

01:13

your neighbor even has one You remember him explaining the

01:16

crack in his shower glass as having come from flying

01:19

one of the nano drones inside the house off the

01:22

little drone company was a bolt on acquisition of the

01:25

much larger one at the time blade runner bought nano

01:28

drone the combined company had great times and then fell

01:31

on very hard times Something bad clearly happened to their

01:34

businesses That chart line known the stock thing looks like

01:38

well everything suddenly fell off a cliff here on a

01:41

dark mid january day some time a few years ago

01:44

you wonder how this stock didn't make your radar in

01:47

the past but well you can see why it traded

01:50

at a massive fifteen a billion dollar market cap at

01:53

one point in his career and then it slowly steadily

01:56

decline that's pretty much tiger peeking in a way where

02:00

it ended up and it only hit your maximum two

02:02

billion dollar price point this week because while the overall

02:05

market has been edging downward and the stock was just

02:08

recently pulled below that floor by the overall market trading

02:12

down from having held the market valuation of two point

02:15

two billion dollars for about six months as of last

02:17

month And well now with the overall market weakness it's

02:21

traded down to a market valuation of one point Eight

02:23

billion dollars Anyway you wonder maybe this is a company

02:27

that in fact not everybody in my field has yet

02:30

looked at you dig up an old cell side brokerage

02:33

report and you find a spreadsheet on the company buried

02:36

in the appendix which nobody reads anymore You note that

02:40

the analyst is a washed up dinosaur from the buy

02:43

side actually who used to be somebody in quotes And

02:47

you remember having these dinosaurs teach you in business school

02:49

noting that they forgot more than you'll likely ever know

02:52

about your industry They were just hit by a stock

02:55

meteor unluckily one day or got bored or got so

02:58

rich they just wanted to retire in pence became dinosaurs

03:01

but regardless you know that his spreadsheet analysis is way

03:05

better than yours And you wonder if the old phone

03:07

number attached to his name works anymore You wisely jot

03:11

It down this chart tells a fascinating story You can

03:14

go through it line by line by line You're currently

03:17

in twenty twenty three of course and you're looking back

03:19

at the trailing five years of progress in this company

03:22

if you just start with line one units at wholesale

03:25

while the numbers or dramatic remember that units at wholesale

03:29

refers to the number of blade runner drones that were

03:31

sold to retailers like wal mart and target the drones

03:34

were then marked up and sold to consumers The retailers

03:37

also made a deal with blade runner to service broken

03:39

drones if consumers paid an insurance premium of one hundred

03:42

dollars to cover three years damage But you ignore that

03:45

as a trivia point at this point and it looks

03:47

like blade runner was growing unit volume by eight percent

03:51

a year and and it really hit the skids and

03:53

actually declined And you're thinking why drones are today more

03:57

popular than ever was pricing too high and you look

04:01

down a few lines and you see the wholesale price

04:03

points is declining a bit seven eight percent after a

04:06

few years but you remember that drones airway cheaper today

04:09

For five hundred bucks you get an amazing drone So

04:12

how is it that these drones are still selling for

04:14

such a high price in the market Moved in the

04:17

market leader you're guessing you didn't Then you look at

04:20

sales from the website Well they doubled from eighty two

04:23

million to one hundred fifty five million in the same

04:26

time that the whole sale units were flat at two

04:30

hundred sixty million what's More interesting is that sales directly

04:33

off the web site on a unit basis actually went

04:36

up That is they cut out the middle people in

04:38

the retailers and just kept all that margin for themselves

04:41

Sails off the website were likely way more profitable than

04:44

the wholesale channel selling to the brick and mortar guys

04:47

Interesting resource allocation shifts when you look up the site's

04:50

traffic on quant cast and you note that it is

04:53

massively traffics today In fact it's one of the top

04:56

hundred most traffic cites in america almost is traffic to

04:59

shmoop up then you go to the google ecm grid

05:01

and look up the keywords that the company is buying

05:04

their will they pay up bukka Click for keyword drone

05:07

yeah expensive but probably productive while you keep hunting upon

05:10

deeper inspection Overall revenues went from three hundred forty three

05:14

million to four hundred eighteen million in this time period

05:17

but they didn't get there in anything close to a

05:19

straight line And you can totally see how the stock

05:21

cratered in january of twenty twenty one just by looking

05:24

at the revenues line You guess that at the time

05:27

the street believe that the company would grow margins twice

05:29

as fast as revenues as the incremental drone didn't cost

05:32

the company all that much to produce So revenues went

05:35

from three hundred forty three million teo three eighty four

05:38

million and four forty seven The street was probably thinking

05:41

that the next year would be something over five hundred

05:43

million with good margins will instead the company shrink revenues

05:47

almost three percent and instead of the five hundred million

05:49

the street expected the company printed only four hundred thirty

05:53

five million who huge miss especially where it hit earnings

05:56

So instead of a company estimated four to five years

05:59

later being over a billion dollars in revenues well that

06:02

company would be lucky to be half that amount No

06:05

Wonder the earnings multiple went from forty times with a

06:08

stock price in one hundred twenty dollars range toe only

06:10

twelve times with the stock price under fifty bucks you

06:14

skim through the operating data and jump to the bottom

06:16

line You note that aftertax earning stall that around eighty

06:20

million bucks a year but with cash earnings and meaningful

06:22

e higher than that like a hundred million so they

06:24

must be depreciating something ah lot you wonder if that

06:28

depreciation is phantom iii The asset will in fact last

06:32

another century and it's only accounting rules that air forcing

06:35

the company to depreciate it Or if that depreciation is

06:38

riel by either company will have to replace whatever asset

06:42

it is that it's depreciating so heavily and you note

06:44

quizzically that company generated last year almost five dollars a

06:48

share in cash earnings Well it apparently started with zero

06:52

dead and zero cash at the beginning of two thousand

06:54

eighteen in order to accommodate the convenience of this shmoop

06:58

course so the company's generated almost half a billion dollars

07:01

of cash in the last five years and you think

07:04

to yourself this can't be right Well the company has

07:07

twenty million is shares outstanding with about four hundred sixty

07:10

million divided by twenty calls and twenty three dollars a

07:12

share in cash So if you got rid of the

07:14

cash part in the market cap at fifty bucks a

07:17

share will the streets on lee giving about twenty seven

07:20

dollars of value to the company for its a four

07:23

dollars and eighty cents ish in cash earnings this year

07:26

which sounds just super cheap And then your head flashes

07:30

to wondering about that insurance product that the retailers sold

07:33

for one hundred bucks You're wondering if maybe there was

07:35

some liability attached to that which has scared off investors

07:40

and you're wondering if maybe there was a you know

07:42

defeatist thing going on like with the robotic lawnmower situation

07:47

like drones giving people lots of really tight haircuts So

07:50

all of these things rattling your brain is you can't

07:53

figure out why the stock is so cheap And then

07:55

you turn to the latest filings gadflies and other street

07:57

onlookers who tried a list semi accurately who the big

08:01

shareholders are in various companies and you look down the

08:04

latest list and you see infidelity there one point five

08:07

million shares and capital research one point three anti wrote

08:09

one janice and the founders out five hundred thousand then

08:12

a long list long tail of vanilla mutual funds No

08:16

one's ever heard of you Summer interned in that world

08:18

as a mutual funds summer analyst You know enough about

08:21

it all to know that mutual fund managers have like

08:24

eight thousand things going on all the time And the

08:26

last thing they want to mess with is a lot

08:28

of detail work on a would be dying company which

08:31

isn't going to move their portfolios performance in any meaningful

08:34

way They ignore it So you're wondering aloud if the

08:38

offer the right one came in it a sixty bucks

08:41

a share Sixty five bucks Well you're guessing that a

08:43

majority of shares would vote Yes And you'd be the

08:46

proud new owner of may be great Maybe dying drone

08:49

company Well the board is also a big consideration here

08:52

At the end of the day shareholders elect board members

08:54

to then govern the company more or less well part

08:57

of governments is deciding whether or not to sell at

09:00

a given price instead of terms Well the board appears

09:02

to have just five members two of whom are founders

09:05

of the company one who's a friend of the founder

09:07

and two notionally independent board members who you think are

09:11

probably not all that independent So this is a company

09:14

clearly controlled by the founders the insiders and in order

09:17

for you to be ableto buy it you're going to

09:19

need teo be on board with the board and that

09:22

goes for their operational expertise as well The management people

09:25

who brogna who bring this company from zero to something

09:28

Yes they've stumbled relative to wall street estimates the last

09:31

two years but they built this place from scratch and

09:34

you estimate that they know somewhere between one thousand and

09:37

ten thousand times as much as you will ever know

09:40

about the drone industry So you want them all in

09:43

and you note with odd sadness for them that today

09:46

they only own about two and a half percent of

09:48

the company in the five hundred thousand shares they're listed

09:52

as having you wonder if they sold shares along the

09:54

way or if they were just diluted down with round

09:57

after round after round of financing that's five hundred thousand

10:00

divided by the twenty plus million shares out sanding and

10:03

that's How we got that two point five percent thing

10:06

So yeah your interest is piqued And yeah we're going 00:10:09.378 --> [endTime] on to the next video to continue the saga

Full Transcript