Netflix

Shares in streaming giant Netflix (NASDAQ: NFLX) have lost more than half their value over the past year. One of the key reasons is that investors are nervous about previously-fast-growing subscriber numbers starting to fall.

I think the worries are overdone. Netflix has an excellent business model, in my view. It can spread the high costs of producing quality content across millions of customers. As the costs are basically fixed but subscriber numbers are variable, the company can tweak pricing to minimise customer turnover. On top of that, the costs are a one-off. Like other broadcasters, Netflix might still be earning money from content it makes this year, two or three decades from now.

The high costs of making new, compelling content are a risk to future profitability. If Netflix does not keep doing this on a regular basis, it could lose subscribers. But I think its strong market position and potentially lucrative business model make it an attractive share for my portfolio.

eBay

Another name among beaten-down growth shares I have been eyeing for my portfolio is online marketplace eBay (NASDAQ: EBAY). The shares have fallen 25% over the past year.

eBay has not consistently grown in recent years. Yet I continue to group it alongside other growth shares however, and last year revenues rose 17%. With its scalable platform and large installed customer base, I expect the business to keep expanding for a long time.

It also has strong pricing power. For many of the items sold on eBay, there simply is no competitor with the same number of possible buyers. So even if eBay pushes up prices, sellers have limited options to go elsewhere if they still want to reach the same size of audience.

Over time, although I expect revenue growth to be modest, I do reckon the company can keep growing. I also think its pricing power could help the business boost profit margins in future. For those reasons I would be happy to buy eBay for my portfolio.

Will these shares recover?

Both Netflix and eBay have fallen a lot in the past year. This suggests investor sentiment has turned negative. Could that continue, pushing the share prices even further down?

I think it could. But as a believer in long-term investing, what attracts me to these shares is not where their share price may go in coming months, but rather the potential level five or 10 years from now. I think both have attractive business models that give them a strong competitive advantage and pricing power. That can be the basis of growth in both revenues and profits.

Why I like the business

As a user, I find different elements of eBay quite frustrating. But I still use it because it offers me a range of products I simply could not find anywhere else.

That gives eBay a unique competitive advantage, or a moat as Warren Buffett would call it. It can use that to increase prices and make substantial profits. In fact I think it could do that far into the future.

What if the company overestimates its pricing power and new rivals undercut it on price? I do not think it would matter much. eBay is a classic example of a business with what is known as a network effect: the more people that use it, the more useful it becomes to them. A new rival would struggle to attract buyers due to a limited offering. In turn that would make it hard for such a site to attract sellers. By contrast, eBay’s large user base creates a virtuous circle.

I think eBay has a simple but spectacular business model that could endure far into the future.

eBay shares are looking unloved

Clearly not all investors share my enthusiasm for the investment case. The eBay share price fall means that the internet giant now trades on a price-to-earnings ratio of 12. That looks like excellent value to me. The company’s dividend yield is 1.8%.

There are risks to the business that help explain why its price has tumbled. The pandemic-era surge in online shopping has not lasted. That helps explain why eBay’s reported revenue in the first quarter fell 6% compared to the prior year period. Earnings were negative, meaning the company lost money in the quarter.

I think the long-term demand trends are positive. Online shopping is clearly here to stay for many people. I expect it to keep growing over time, especially for many of the specialist items sold on eBay. While a recession could hurt revenues for many retailers, eBay is a modern form of jumble sale where people can find real bargains. So I think it could thrive even in tough economic times.

I see value

I do not think the short-term trends detract from the appeal of the eBay investment case, though. The business model has been proven over decades and looks excellent to me. That should enable the company to make profits for a long time, while its pricing power could help it boost margins in future.

The current valuation looks cheap to me for such a strong business. I would consider adding eBay shares to my portfolio because of that.

In short, our world is walking into the double-edged sword of virtual transactions: the farther away we move away from hard currency — or, as in the case of mobile transactions, even the quasi-virtual realm of plastic — the easier it is to buy and sell, and the easier it is to grift. Are we risking more than we stand to gain?

On the positive side

Let’s take a look at the pros in the equation. Clearly on the winning side in the game are small-business owners — indeed, the very, very small. For a company just getting its foot in the door, the £200+ needed to set up a traditional point of sale (ie, a cash register) could be better spent elsewhere if possible. With wireless payment apps such as Shopify POS or MONI phone, the only real cost is the mobile device itself, and it’s likely that the vendor will own one anyway. 

More important than cost, however, is the potential for breaking ground in previously cash-only terrain. Many familiar small-scale vendors — farmer’s markets, for example — are by nature ‘on the go’ and sometimes literally selling goods from the back of a truck, making dealing in cash a necessity until now.

Significantly, as young entrepreneurs are exploring are challenging economy with pop-up shops hawking everything from high-end tacos to haircuts, mobile transactions can be absolutely necessary. As almost all sedentary businesses give the option of “paper-free” transactions, fewer people carry cash, a reality that small-business owners must face.

Within the realm of traditional banking, the advantages of new payment technologies are legion. Paperless billing is an obvious boon to world ecologies, and takes away the hassle of mailing checks for recurring outpays (not to mention having to remember them).

While there is always the spectre of fraud in electronic transactions, today’s ways of doing business can actually be on the side of consumer protection. In the past, for example, most vendors would accept cheques only from customers who had clearly established identities. If you’ve already set up security protocols with a provider like PayPal, you’ll need not prove yourself at every point-of-purchase.

Image Courtesy of cruzaj90 of flickr.com

On the downside

The ease with which consumers can make transactions is inextricably linked with its dark side: it’s more than a bit easier to steal data, money and even identities. Indeed, credit card data theft has increased by over 50% in the last few years, and some pundits predict that virtual crime will soon surpass traditional theft.

Ever-ingenious and even assisted by programmes designed to steal personal data, hackers are surprisingly adept at phishing for passwords and other security clearances. More in the vein of traditional fraud, some scammers may steal credit card data by posing as a legitimate vendor — or, sadly, while working for one — only to be used later. In the most alarming cases, thieves can steal information from cards rigged with RFID tags without even touching the victim’s possessions. 

With mobile apps, things can get even trickier. eBay (NASDAQ: EBAY.US)-owned PayPal, for example, makes it so easy for you to make in-person transactions once you’ve set up security measures online that you can swipe your phone for purchases even before your PayPal card has been issued. The positive light in this is that PayPal takes its security seriously, and goes the extra mile to set things right in the case of fraud. Indeed, the fraud department at many banks will generally reimburse consumers who can present a reasonable case they’ve been scammed. 

There’s another downside to PayPal’s current bid at getting in on the near-field communications, or NFC, game:  its tech doesn’t always work.  Currently, the transactions giant has yet to scale its operations so as to accommodate the mom-and-pop sector, so consumers trying to pay for, say, a slice of pie at the corner diner may often meet with glitches and delays. As PayPal isn’t the only behemoth of its ilk eager to command the ever-expanding NFC field, such virtual gremlins can be tolerated only on pain of PayPal’s company value.

Currently, mobile transactions are only a small piece of the pie, but with the world becoming more infused with technology and companies such as Monitise (LSE: MONI) ever-expanding, it seems there is no turning back. Launched ten years ago, Monitise is a virtual avatar for companies eager to service consumers who would rather devote as little time as possible to banking chores as possible. For such market responsiveness to stakeholder desires, Monitise is currently sitting on assets valued around £26 billion per year through transactions, and in December 2013 was reported to see a roughly 50% growth in overall revenue, a 70%+ gross margin before its fiscal year closes in June 2014 and will also greatly benefit from a 5-year “Mobile Money” partnership with a top UK banking company, for which they will facilitate a digital banking, payment and shopping service. It’s probably safe to say that Montise isn’t going anywhere.

As Miranda Marquit states in her expose on wire transfers and technological payments, the convenience of technological banking advancements will always outweigh its issues to the general public. Therefore, while new transactional technologies are an overall benefit, they should be handled with care. Choose highly cryptic passwords unique for each provider, and change them from time to time. Set up truly idiosyncratic security questions that no one could glean from your public data. And only make transactions via fully secure servers with firewall and spyware protection. Nothing is a 100% guarantee against the cunning of hackers, but the odds will be in your favour.

Whereas once corner shop competed with corner shop, and national supermarket competed with national supermarket, now national supermarkets compete with global internet retailers.

So it is not just a case of a battle between the UK supermarkets. It is also now a case of Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) vs Amazon (NASDAQ: AMZN.US) vs eBay (NASDAQ: EBAY.US).

Internet retailers may soon compete head-on with the supermarkets

If you have checked out Amazon’s website recently, you may have noticed that this company has expanded the range of products it sells beyond CDs, books and electronics to groceries, home ware and health and beauty products — the type of thing your local supermarket would normally sell.

Amazon at the moment is just building the infrastructure for what I think will be a big move into the grocery market. I think it is only a matter of time before Amazon broadens its range of products to really compete head-on with the supermarkets. We are seeing the collision of the worlds of the internet and supermarkets and the High Street.

But there was some interesting news last week which I think has opened up some new avenues of possibility in retail.

Win-win, not war, war

Internet retailer eBay formed an alliance with High Street retailer Argos (which is part of Home Retail Group). So soon we may see eBay products being sold not just on the internet, but on the High Street as well.

As soon as I heard about the deal, I could see the logic. It is win-win for both companies: Argos gains access to eBay’s unrivalled product range, while eBay gains access to Argos’ extensive network of stores.

Instead of the retail giants fighting with each other, there is much to be gained from working together. What could be next? An alliance of Amazon with Tesco? How about an alliance of eBay with Walmart?

Instead of spending billions on establishing a global internet retail network of its own, why couldn’t Tesco piggy-back on the Amazon infrastructure? And if Amazon were to sell in Tesco stores, it would gain access to millions of new customers.

Of course, this is pure speculation at the moment. But already we are seeing alliances being built, and companies are beginning to step across the boundaries. Now that Tesco has launched its own tablet, it seems anything is possible. What is sure is that the world of retail will evolve quickly over the next few years.

The following is an unedited transcript of this Fool podcast:

Owain:

Hello, and welcome to Money Talk, the investing podcast from The Motley Fool.  I’m Owain Bennallack, and joining me in the studio today, we have Nate Weisshaar from our Champion Shares Pro and Share Advisor services, and we have Stuart Watson, one of the longest-serving Fools here in the UK office, and so the man who knows where all the skeletons are hidden, or the keys to the cupboard, or whatever the metaphor is.  Welcome to the studio, chaps.

Stuart:

Good to be here.

Nate:

Glad to be here.

Owain:

As we record, it’s summer.  It may well be over by the time you listen to this, listeners, but it is summer.  Are we glad to be in the office, or would we rather be at the beach?

Stuart:

The golf course, maybe.

Nate:

Yeah, I think I’m glad to be at the office.

Owain:

Would you want to be schlepping around a golf course?

Stuart:

Yeah!

Owain:

It’s a lot of work.  Well, I’m looking forward to my summer holidays.  I’m going to go somewhere where it will be guaranteed to be sunny.  One man who is definitely on the job already is the new Bank of England Governor, Mark Carney, who began his five year term this month. It’s probably too soon for a holiday for Mark, and besides, as we’ll discuss in a moment, he’s got quite an in tray to work through.  Also in this podcast, we’ll look at good news for any of you who are into your AIM shares, and we’ll consider what the latest news on the UK’s shale gas reserves could mean for our country, as well as our investments – all that, plus we’ll reveal three companies that we’re paying particularly close attention to this month.  Chaps, those high-flying city slickers may be already sunning themselves elsewhere. The markets usually wind down over summer, but I think we’ve got quite a lot to get through.

Nate:

Let’s do it.

Owain:

Let’s do it – those are the words I was looking for.  You can always rely on an American to get to the chase.  OK, so Mark Carney – he’s not American, he’s Canadian. There is a difference apparently.  It’s about, how far is it from the Niagara Falls? – it’s on the border, isn’t it? – a couple of metres. Mr Mark Carney, the great Canadian hope, has taken over from Sir Mervyn King as the Governor of the Bank of England.  Carney was the Governor of the Bank of Canada until he, let’s face it, upgraded to run our own central bank.  He’s also done time at Goldman Sachs, so unlike perhaps Mervyn King, Carney knows the markets.  He’s not so academic. When he’s not steering an economy through a major economic crisis, this 48-year-old married father of four enjoys ice hockey, which he used to play in college, and he also enjoys looking a bit like George Clooney, who would probably play him even, in a movie about Mark Carney.  Stuart, Mark “George Clooney” Carney, he’s given himself five years to save us from ourselves, but realistically, what can we expect from him?

Stuart:

Yeah, I’m not sure I’d pay to see that movie, even with George Clooney in it.  The situation we’re in at the moment, the conversation seems to have shifted a bit. We were talking recently about double dips and triple dip recessions, but now we seem to be looking a bit towards sort of flat to gentle growth, very gentle growth, so that’s changed a little bit.  What he’s going to do, he’s probably going to change the emphasis away from managing the inflation target, which you could say, the Bank’s already done that, the last few years.

Owain:

He’s going to officially …

Stuart:

Officially dump that, and move it more towards growing the economy, and to do that, he’s probably going to look at what’s called long-term guidance.  So basically, rather than saying, this month we’re just going to leave rates unchanged, they’re going to say, we’ll leave rates unchanged until twelve months ahead, or until unemployment comes down to say 6%.

Owain:

I have a couple of points on that.  Firstly, my understanding was that we feared that he was going to do that, if we are kind of worried about our savings being inflated away.  But didn’t George Osborne confirm that wasn’t going to happen, the change in targeting? – in terms of, he’s still going to have to have these inflation targets.  He might just carry on in the Bank of England’s tradition of saying, yeah – inflation’s a little bit high, like it has been for the last five years, but best to not worry – we’ll run rates really low.  Secondly, I’ll also get you with my right hook, which is that, isn’t he doing forward guidance, because he can’t do anything else?  If interest rates were 5%, he could just merrily slash them away to 4%, but he can’t really cut .5% any further, can he? – so it’s a bit of a desperate measure, isn’t it?

Stuart:

Yeah, that’s where quantitative easing comes in really, and that’s when you can’t cut interest rates.  But I think the Chancellor’s asked the Bank to come up in the next inflation report, which is early August, to set out ways they could look at this forward guidance, so we’ll find out a bit more detail then, so it’s only a few weeks away.

Owain:

So do you think he’ll be a revolution at the heart of the Bank of England? – or is he more of an evolution?  It will look very different with George Clooney at the helm, but ultimately it’ll still be the same old 300-year-old Bank of England?

Stuart:

Possibly, I mean it’s still very early days, so it’s a bit hard to tell.  From what we’ve read about him, he does seem to be the “rock star” that they’ve been calling him, and there have already been some departures from the Bank of England, so we could see some changes there.

Owain:

Will we see groupies on Threadneedle Street?

Stuart:

No.

Owain:

Nate, a few cynical curmudgeons, and I’d like to think I was ahead of the pack (I always am, when it comes to being cynical), they have carped that Mark Carney may have left Canada in the nick of time, haven’t they?

Nate:

I cannot refute that statement.  He does seem to be riding a nice wave right now, into a very well-paid job here in London.  He came into the Bank of Canada after the country had done its serious fiscal restructuring in the late Nineties, and at the time of the commodities boom of the early 2000s, which Canada benefited from, so he was, in his role at the Bank of Canada, at an ideal time really.  Now, as he’s leaving, we see that Canadian consumers are highly indebted to the point where it’s slowing down the economy.  So he may have picked the right time to exit.

Owain:

As you say, it was a commodity boom.  It was a successful economy, and he went to work every day, and just said, yeah – great, isn’t it?  But once people don’t want all that Canadian stuff that they dig up, it’s going to be a little bit harder in Canada.

Nate:

It’s going to get tougher.

Owain:

OK, well moving on from Carney’s aims to AIM shares, neat?

Nate:

Ooh, very good!

Owain:

That’s why I’m in this seat.  We’ve got some not unexpected but still welcome news from the government, right, Stuart?

Stuart:

Yeah, that’s right, so we’ve had this consultation going on for a while about, would the government let AIM shares into ISAs?  So, for several years, it said, no, they’re too risky, and we don’t want them in there, but recently it’s changed its mind.  Then recently, we heard that this is going to be allowed, so later this year, hopefully.

Owain:

So, does this mean I can just immediately go out, stuff my ISA full of dodge miners, semi-fraudulent financial services companies, as soon as we finish recording?

Stuart:

As opposed to all the other dodgy stuff you’ve got in your portfolio?

Owain:

Yeah, I just want to put them in an ISA. 

Stuart:

It looks like autumn is the date, which is nice and vague, so we don’t know yet, so obviously that’s before the next tax year, but probably needs some time for brokers to update the systems, so they can just say, which is an AIM share and which isn’t, and all that sort of stuff.

Owain:

What about the other perks of AIM shares – are they going to live on?

Stuart:

Yeah, possibly.  We thought that some AIM shares qualified for inheritance tax relief, and we thought that might go as part of this.  If you’re giving them more tax area in one area, then you might lose it somewhere else, but from what we’ve seen so far, it seems like that will continue.

Owain:

Yeah, the inheritance tax is interesting.  I always thought it was a handy tax bung, but I believe it’s in place so that small companies can hand on their company to their heirs, so I guess they have no choice, although how much of your company can you really shovel into an ISA over 30 years? – if you’re talking about literally a 30% holding in a £20 million company.

Stuart:

Yeah, well it applies to ordinary investors as well, so if you own AIM shares for two years, and they meet all the other qualifying criteria, they’ve taken out of your stake for inheritance tax, but it’s mainly for UK companies, so if they do the majority of their trade in the UK.  But if you look at AIM companies now, there’s lots of them nowhere near the UK at all.

Owain:

Yeah, I mean, I was joking about those crazy Kazakhstan miners, and whatnot, although they’re in the FTSE 100, so it makes AIM looks like a very respectable place.  There are obviously lots of really good AIM companies, I believe, particularly those family-run ones I mentioned.  I don’t see any reason at all why I shouldn’t be able to ISA them.  But Nate, are they riskier than fully-listed companies? – this is what we’ve heard some of the critics of this change say.

Nate:

Well, they’re naturally going to be riskier just on the basis that most of them are smaller than fully-listed companies, and smaller companies are more subject to economic fluctuations.  So you’ve got elevated risk there, and then you’ve also got the lower regulatory requirements, which means you can have more dodge small companies running around.  But I think any investor who approaches them cautiously with a cynical eye, which Owain, you’re very practised at this; so if you’re going into AIM shares with one eye towards the fact that, yes, they’re smaller and potentially more risky, then I think you should be fine. 

Owain:

So does being able to put them in an ISA, would that make you any more likely to consider them for Champion Shares Pro?

Nate:

No, we’ve never really considered it to this point.  We look for good-quality companies wherever they’re listed, so this doesn’t really change anything for us at Pro, but it may change things for our members.

Owain:

Yeah, it might make them more likely to, not everyone has a few million pounds to invest, I guess. Some of them only have a certain amount to go round, and they like to put it in their ISA, I guess, so it’s good from that point of view.

So, let’s move on then to the news – the headline news.  Let’s put it in the diary, this was the time where the UK really took off, because we have found out that our country is floating on top of an even vaster reservoir of shale gas. I don’t know if you have a reservoir of gas, but we’re going to actually debate what word I should use here.  A much bigger quantity of gas is believed to be underneath Blighty, and shale gas, of course, is the stuff that America’s been tapping into for a few years by the technique known as fracking (careful how you say that, if you’ve got a blocked nose).  Some people are claiming that it could revolutionise our energy situation in a similar way to what’s happened in America.  In America, they’re saying this is going to be a new boom.  China’s had it; everyone’s going to start making stuff in America again.  If they’re going to revitalise the rust belts of America with shale gas, can we bring back the Midlands? Can we have those dark, Satanic mills churning away in the centre of the country all over again, 1800s, here we come? – Nate, is this all hot air?

Nate:

I don’t know – you paint such a bleak picture.  I don’t know that it’s all hot air.  I think we’re still very early in this process, and the potential for shale gas is good, because the North Sea’s reserves are shrinking.  Production for gas for the UK is going down, and the country’s having to import more and more of it.  So if they can find a new source, it bears well for the future.

Owain:

That goes back to the Carney comments again, and Stuart’s comments about inflation.  One of the reasons we have inflation, of course, is we have to import more energy than we used to.

Nate:

Yep, and if the pound continues to weaken, and Carney continues to have his early effects on the currency, the energy imports are just going to get more and more expensive.

Owain:

So I’ve said that we’re floating on top of a gargantuan quantity of this gas, Stuart. I think gargantuan quantity is not a technical term that’s used in the oil and gas industry.  Can you just briefly explain, what’s the correct terminology for where we are with this gas?

Stuart:

Well, what they’ve actually come up with is what’s called “gas in place”.

Owain:

It’s not indigestion?

Stuart:

No – it does sound painful, but I think it’s something like 1,200 trillion cubic feet, which sounds like quite a lot, doesn’t it?

Owain:

It is gas.

Stuart:

It is – that’s a lot of gas, but not all of this will be commercially recoverable, so it could be somewhere between say 5 and 10% of that amount could be commercially recoverable.

Owain:

So when we know how much we think we can commercially recover, we call that a reserve.  Do you have your proven and probables?

Stuart:

Well, you have to do a lot more work, drill a lot more wells, and prove it was there, and this is really just a, very much finger in the air, or finger down the pipe at the moment.

Owain:

I’ve also heard that, something that might keep a revolution at bay, is that all the gas is under really pretty parts of the UK. Someone was saying that basically, if the gas was under Basildon, similar, do you think there’s … ?

Stuart:

Well, looking at the report, basically they looked at an area which was the north of England, so it was basically everywhere from Derby, Nottingham, upwards to York, and it was right across the country.

Owain:

So it’s like the Peak District, and the Yorkshire Dales?

Stuart:

So how many wells you’ve actually got to drill to get this stuff out? – obviously, if you look to America, you’ve got great swaths of land where there’s virtually no-one living, but last time I went to the north of England, there was quite a few people there.

Owain:

I’d like to see a new series of Last of the Summer Wine, as Compo wanders past a gas rig.  Look, I hate to be a party pooper again, but besides my fears for the prettier parts of this country, and the worries that people have that fracking may cause earthquakes, pollution, flames to come out of your tap – that’s obviously over-egged, but that’s what they say, and the fact that our infrastructure is still in its infancy, is nobody concerned at all about global warming?  I literally heard this very week that the last decade was the hottest decade there’s ever been, and I know that I can go onto the internet, and quite rapidly find someone who doesn’t believe in global warming, but the world’s eminent scientists who are also putting us into space, and building super-computers and whatnot, they seem to think that the chances are it’s caused by the manmade temperature situation from burning hydrocarbons.  So even if this shale gas does lead to this kind of industrial revolution mark two, isn’t it going to be problematic, because nobody’s going to get any funding that can be competitive to put up a wind farm, or solar panels, or any of those other nice things which were kind of coming along quite nicely, and almost becoming competitive?  Are you guys not worried about this?

Nate:

I think that’s a definite drawback.  It’s one of the big issues facing energy decisions going forward, is how are we going to fund all of the alternatives? Of course, solar isn’t a great solution on this island.

Owain:

Look out the window – that’s sun!  You’ve been here eighteen months, but there it is.

Nate:

The thing with solar and wind is that they are intermittent, and so you always will need a back up supply, regardless of how advanced solar and wind become.

Owain:

But that would be fantastic, if it was literally a back up supply, but we all know that, once you’ve dug some wells, you can just burn it and sell it cheap – that’s what’s going to happen, isn’t it?

Nate:

As you’ve pointed out, the likelihood of digging wells wherever we like is probably limited here in the UK, whereas in the US, fracking takes place out in the hinterlands, scrublands which nobody really cares about.  I think there are some significant hurdles here, so while your green protest is acknowledged, I think you needn’t worry about the consequences just yet.

Stuart:

I think we’re going to need this, and renewable energy, really.

Owain:

Much as I’ve done my bit for Greenpeace, it’s fair to say that it is lower CO₂ than carbon, isn’t it?

Stuart:

Yes, it’s much better than carbon, certainly.

Owain:

It’s out of the fire, and into the frying pan.  Well, Stuart – sticking with the theme of profiting from the long-dead remains of dinosaurs (I’m paraphrasing the geology; I think I picked up some of your insights there, but probably a bit more to learn); I believe one of the companies you’ve got your eye on currently also operates in this kind of space?

Stuart:

Yes, it’s BG, which reports second quarter results later this month. Obviously it’s the old British Gas.  It’s now much more of a gas explorer, but it’s had, after ten years of quite rapid growth, up until about 2007/2008, I think the share price went up about ten times.  The last five years, it hasn’t really done much at all.  Production has been fairly flat.  But now it looks to be getting its act together. It’s got a new CEO, the guy was there for about twelve years, and it looks to be entering its next phase of growth, hopefully.

Owain:

Is it in the FTSE 100?

Stuart:

It is, yes – about £40 billion, market cap.

Nate:

Stuart, speaking about the flat production, which obviously upset the markets several months ago …

Owain:

Yes, because it is worth mentioning that, whilst you’ve painted a picture of a company in the doldrums, they actually went up a lot higher, didn’t they? – and then they plunged, the shares, so a bit more of a rollercoaster.

Stuart:

Yeah, that was probably more to do with the oil price shooting up back in 2008, I think, when it reached $140 a barrel.

Owain:

This is what you get for being a veteran, you see – a 40% crash.  That’s the doldrums.

Nate:

So, looking forward, how are we feeling about the production in the coming years?  Management just came out with their 2015 strategy guidance.  Are we happy with where we’re going?

Stuart:

It looks pretty deliverable.  I think, going back, BG gave longer term guidance, and now it’s going back to just about two years ahead.  I think it’s predicting about a 25% increase. Most of that’s going to come from Brazil, where they’ve got these offshore vessels. There’s fifteen being built in total.  I think we’re now up to about three, and there’s two more coming on line next year, so that’s where most of the growth is going to come from, I think, and so far they’ve been delivered on schedule and started production on schedule.  So if that continues, then I think we can be reasonably comfortable.

Owain:

Nate, you’re also keeping your eye on one of Britain’s older companies at the moment, aren’t you?

Nate:

I am.  I always keep an eye on these guys, they’re very interesting – Rolls Royce, also reporting later this month.  It’s just a great, innovative company that’s lined itself up with some great long-term trends, specifically the growth in air travel.

Owain:

I was going to say, this is going to sound extremely silly to you, but for the benefit of listeners, these guys don’t make the cars, do they?

Nate:

No, not any more.  That’s been sold off.

Owain:

They primarily make engines.

Nate:

Now they focus on big, big engines – commercial airlines, military jets, as well as large boats.  So they make turbines, is what they do, and they’re on all of the new fancy, the Boeing Dreamliner, which is turning into a nightmare currently, and the Airbus A350s.  The best part of their business model, though, is that not only do they sell these engines to be on all these amazing flying vehicles, they have service contracts which are recurring revenue over the course of many years.  So there’s good visibility on their business, and good cashflow.

Owain:

I notice, in response to George Mark Carney Clooney’s initial comments from the Bank of England that the pound went down again against quite a lot of currencies.  Presumably this is good news for the likes of Rolls Royce, who, Boeing you’ve already mentioned, are an external company.  A weaker currency, good for Rolls Royce?

Nate:

It’s good for any UK-based manufacturer.  For Rolls Royce, they do a decent amount of work within the country, but the big thing will show up.  They sell their engines generally in dollar terms, US dollar terms, so those sales, if the pound falls, will appear larger, and so that will benefit them.

Owain:

And are they even close to being cheap at the moment, do you think?  They always look expensive.

Nate:

Yeah, they always look expensive.  Right now they look, I would say, pretty expensive.  I always keep an eye on them, because if there is an opportunity, I want to jump on it, because they don’t come around very often.

Owain:

OK, well we turn to my share, and luckily one of us is looking away from digging up hydrocarbons, and making machines to burn fuel in. Being a futuristic sort, I’ve been keeping my eye on eBay. In fact, I successfully bid for a few of the shares myself earlier this month.  So eBay, we all know that it’s where our mothers go and buy patchwork quilt material, and where we sell the kind of rubbish that we have in the garden.  But really, that is, to some extent, the old eBay.  It’s still there – they’ve sexed it up recently, and it’s working well, but there’s a whole other side to eBay.  First of all, there’s PayPal.  A lot of people know PayPal from eBay, as the way you pay for things, but that PayPal business is rolling out well beyond eBay, and also the growth is incredible. There are up to 123 million PayPal accounts now, working PayPal accounts, and as the world moves to digital money, that’s just an enormous potential giant behemoth sitting within eBay.

Secondly, eBay is kind of becoming an enabler of digital commerce, so fine, you can go and buy some old socks on eBay, or whatnot, but all that technology, and everything they’ve learnt about helping people buy and sell stuff online, they’re offering it up to other companies, other retailers, to get them online more efficiently.  They’ve got the whole kind of merchant services division, and they’re massively big in mobile.  We seen companies like Google, Facebook more recently, sort of how are they going to cope with mobile?  But eBay is way ahead of the game here. It pretty much, when you read its reports, all it does, it talks about mobile.  PayPal is an absolute win on mobile, it’s doing really well, mobile payments for goods and services.  So I kind of think, if you look forward ten years, you can imagine a future in which eBay is helping retailers, online and offline actually as well, sell a lot more stuff.  It’s taking a piece of that.  It’s got its PayPal sitting there which, who knows, could eventually – it’s still very small, compared to Visa or MasterCard, but it could be in the running for that kind of thing; a company that looks really big, but really could be pretty enormous.  It’s not really priced like one of those companies any more.  It’s not cheap, PE is over 20, but it’s not a bonkers PE of 50 or 60, so I commend it to the house.

Stuart:

I’m still thinking, I suppose, when I look at eBay and PayPal, I still think of PayPal as the back end of eBay.  I don’t do a lot of online retailing myself, so is that just a completely outdated thing?  Where’s this increase in accounts mainly coming from these day?

Owain:

Yeah, I mean, it is still absolutely part of the picture, and eBay’s very keen to get people using PayPal, and in fact using its marketplace, because those people then go onto spend more within eBay, and using PayPal.  Even if it’s not actually within the marketplace, they might go off to other stalls, but really, lots of retailers like to offer PayPal as an option, because people are so familiar with it. Some people don’t have credit cards, and people prefer PayPal – there’s cost implications. But also, it’s kind of in its early days, so it’s hard to wrap your head around it, but if you think of a company like, maybe a Sage (probably not a good example); a company that provides infrastructure for other retailers, and even provides data services, so sort of says, if you use this, this and this, you’ll get x% more sales.  EBay’s rolling that technology out, and that enabling infrastructure to other retailers, and PayPal is an attractive part of that.  They can say, we’ve already got all these millions of accounts, and also that in turn will then bring people back into the PayPal universe. So, obviously my share’s the best. Actually, you could leave a comment below perhaps, or email us, to let us know what share you like the most.  I think it’s time for the beach, also known as back to the desk, to do some more work, so thanks Stuart, thanks Nate.

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