Blog Posts

Law #6: obscure data

12/12/2014

Obscure data and lie to investors when necessary--your segment data and operational metrics reporting should resemble a never ending shell game.

Segment transparency reduces your flexibility to shuffle data around when things turn ugly. You want to use selective transparency only when the metrics are in your favor, otherwise you should make analyzing your company as difficult as possible in order to turn people off from actually looking under the hood. For example, unlike every other auto manufacturer Tesla Motors does not report monthly sales data by country. This obfuscation of data allows imagination to take over and analysts can project all kinds of irrational hopes and dreams onto the company's actual results. If you are rolling out a new product country-by-country, but only reporting aggregate sales, it makes it unclear how your sequential and year-over-year sales comparisons look. Teslas's situation is the equivalent of a retailer opening new stores rapidly, but only reporting total sales and not same store sales comps and this provides the illusion of growth when in fact it has the worst growth of any auto maker in the US.

As your operating results and certain metrics move in the wrong direction, slowly disclose less and less and simultaneously shift the focus to a different metric which is not yet eroding. Another tactic to utilize is to consolidate segments when growth in key areas is declining. If things stabilize again, you can unwind the segment consolidation a few quarters/years down the road, or cherry-pick good data to share that is not verifiable from looking at your reported segment data (e.g. "Article in @WSJ re Tesla sales is incorrect. September was a record high WW and up 65% year-over-year in North America.").

Should you wisely choose to limit important disclosures, the most common scapegoat is the competitive landscape. Simply state that you don’t want your competition to know the margins of a certain segment or its sales growth, etc. What you can say is that disclosing the data the investor is requesting could potentially shed light on how amazingly profitable that segment is due to your exciting new products and competitors might use that information in their own price negotiations or in leveraging your customers to switch over because you are making so much money off their backs. This is, of course, a bogus reason, as your competition already knows everything there is to know about your business. Another reason to not have better disclosures would be that you fear analyst can't analyze the data well due to its lumpiness, seasonality, or whatever else you can think of that patronizes and insults the market's intelligence (I for one, can't blame you).

0 Comments

Law #5: Emphasize Meaningless Metrics

12/9/2014

0 Comments

Condition investors to focus on metrics that are unrelated to value creation or true fundamentals like cash flow.

From early stages of your hype campaign, you must condition investors to focus on non-fundamental value related metrics. There are the obvious ones, such as revenue, revenue growth, EBITDA, and adjusted pro-forma operational EBITDA, but I am talking about metrics that are even further removed from actually signaling anything about profits or cash flow. Consider metrics such as number of users, number of units sold, website views, hours listened, number of tweets, miles driven, kwh used on superchargers, etc. The metrics you choose to focus your hype campaign around may be unique to your business model or industry. In fact, they should be unique to your business if at all possible so that investors have absolutely nothing to benchmark you to or compare you to. If you are at a pre-revenue stage you have an even more inherent advantage over your less fortunate, more profitable peers in that you can start with a blank slate and begin to condition investors on meaningless metrics and milestones before cash flow is available to be scrutinized. For example if you are a medical diagnostic company like Exact Sciences, in order to shift focus off your $94 million cash burn rate, you will emphasize how many doctors are signing up to be able to potentially order your diagnostic test. Or, emphasize the percentage of patients complying with the doctor and actually shipping back the bucket of their feces. Whichever metric you choose to condition investors to focus on, it is all in an effort to deflect focus from your cash burn or lack of solid fundamental foundation.

"...we averaged half a billion homes viewed on Zillow from a mobile device. This translated to 200 homes viewed per second, which is nearly 10 times greater than when we started tracking this metric three years ago. To give you some perspective, during the time of this one-hour earnings call, over 700,000 homes will be viewed on Zillow on mobile devices." - Spencer Rascoff, Zillow on the Q3 2014 Revenue Conference Call

"Amazon has released a large amount of data about online sales in 2012, with lots of factoids and vague figures for digital downloads, purchases, and product shipments. And the biggest piece of data revealed by the company was the number of packages it sold on the peak day of 2012.

On Nov. 26, Amazon sold 26.5 million items worldwide across all product categories. That equates to a whopping 306 items per second, a new record, according to the company.

Amazon also shed some insight into ebook purchases for the year. For instance, it revealed that 23 of its self-publishing (Kindle Direct Publishing) authors each sold over 250,000 copies of their respective books in 2012."

"The Amazon MP3 store has sold enough music for everyone at Woodstock ’69 to jam out to another three days of music for peace and love."

"Amazon customers added more than 15 million toys to their Wishlists this holiday season." -- This last one is not even related to anything generating revenue, simply what customers added to their saved wish-lists on their Amazon account. Here they are shamelessly hyping the potential for future revenue.

Any press release or Revenue Conference Call transcript from Amazon will provide a plethora of ideas for you and get your hype juices flowing to assist you in your quest to find meaningless metrics to highlight and condition investors to focus on. None of these data points actually tell us anything about the profitability of Amazon. They could have sold 100% of these items at a loss, but the release had its intended effect which includes dozens of articles written in high profile publications and websites that highlight these meaningless metrics. The amount of press coverage Amazon generates from the meaningless metrics (from an investor's point of view) is mind-boggling and the exposure has a long tail, meaning the coverage goes on and on for weeks/months, perpetuating the cycle of hype.

0 Comments

Law of Hype #4: Tell a Really Big Lie

10/23/2014

0 Comments

Tell a big lie. Simplify your story down to one lie and keep repeating it ad nauseum until it is the prevailing consensus mythology and most everyone accepts it as fact. Get seemingly neutral 3rd parties, such as Wall Street investment banks, to repeat your lie as often as possible, preferably in print or even better, on television. One will not be considered delusional if the lie in question is accepted as normal in their culture/societal/friend circles or some other such sub-group.

"If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State." — Joseph Goebbel

Joseph Goebbels, Hitler’s propaganda minister said “Propaganda should be popular, not intellectually pleasing” and “the bigger the lie the more it will be believed.” You’ve already deluded yourself into believing in your executive ability and entrepreneurial vision, you’ve chosen a wealth-creation vehicle with a large perceived total addressable market, and you’ve chosen an ideal or moral fight to represent (e.g. green energy, cancer diagnostics)…now you must spread propaganda of your product’s superiority or world changing positive impact on society. Consider the extreme magnitude of lies at the likes of Laws of Hype role-model Tesla. The entire premise of the company and its mission to “create the advent of sustainable transportation” is one big fat lie. Why? In actuality the Tesla Model S is not only not green, but is much worse for the environment than most all other vehicles and forms of transportation. The Tesla Model S is considered a zero-emission vehicle because it does not burn gasoline. When considering the full carbon footprint for a Tesla one must consider the fossil fuel sources of electricity to charge it on a daily basis and the massive energy requirements and materials inputs into the actual manufacturing process for a car that weighs an incredibly heavy 4,647 lbs, as much as the new aluminum framed Ford F-150. When considering Musk's hyped up “D”, the Model S requires more materials and is heavier than most trucks on the road. This combined with the fact that Tesla and its supporters tout its acceleration capabilities means everyone is flooring it everywhere, driving it like a bat out of hell, chewing up tires, requiring drive train replacements, and decreasing their fuel economy exponentially. It's nothing new that consumers often expect the contradictory and impossible—we are under national hypnosis with our extravagant expectations. We all want super luxurious cars that are also super economical. Everything I have stated is already a few layers of thought too deep for 99% of Musk worshippers. If Tesla wanted to truly be accelerate “the advent of sustainable transport” they’d be selling bicycles, sailboats, cheap walking shoes, or tiny EVs, like say, oh, the Nissan Leaf or BMW i3, or cars like this. What is more important is to pick your ideal, even if your message and product (along with your affinity for travel by private jet) clash making you a quintessential hypocrite, and tell a whatever lies you need to over and over again to until it is forced into the prevailing narrative. Once a false narrative is established on the basis of emotion, it will rarely change. When it comes to telling your big lie empirical proof and facts are irrelevant—they are boring…proof is tiresome. No one checks the facts nor will they care. People would much rather you spoon feed them an easy lie that serves their purpose than be forced to expend mental energy in search of the truth.

“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly—it must confine itself to a few points and repeat them over and over.” – Joseph Goebbels

Authority:

Kevin Conroy- Exact Sciences

Kevin Conroy has been stringing EXAS investors along for quite the ride lately on the back of deceit, data manipulation, and dishonesty. Exact Sciences' sole product, Cologuard, has been touted as a superior non-invasive, stool-based colorectal cancer diagnostic. Conroy has positioned Cologuard as superior to available FIT tests using blatant apples to oranges comparisons. The false comparisons include comparing Cologuard to the worst possible FIT that was available several years ago (use obsolete test and data), and then taking this worst possible FIT as a single point-in-time test, while the company previously touted the importance of improved sensitivity from cumulative screening. When normalizing any FIT's for the cumulative benefit of taking it each year, its sensitivity trumps that of the Cologuard test that cost over 20x as much. How has Conroy created a $2 billion market cap company that has such a shitty product? He follows all of the Laws of Hype religiously:

“Lay out a really clear story…You have to make the story so clear. “
“You should strive for presentations with one fact or figure…and tell that story.” (this is the lie)
“Tell that story [lie] until you can’t stand the sound of your own voice anymore." Repeat ad nauseum.
“We had over 1,900 meetings in five and a half years and presented at 100 investor presentation meetings. You have to do it so often. Because sometimes you’ll meet with an investor ten times before they’ll invest…when they say no, its okay. Just keep telling the story to them. Eventually, people invest.”

– Kevin Conroy – interview with WSJ Live 10/22/2014

0 Comments

LAW #3: Stand for an ideal

9/16/2014

0 Comments

Pick a fight seemingly based on moral terms, creating a false "us versus them" dynamic.

Your aim is to create a bite-sized narrative whereby you can classify yourself into what may be viewed as the positive or "good" side of a morals-based fight. The ultimate goal of this Law of Hype is to invoke a powerful emotional response, getting shareholders emotionally attached to your stock's outcome. Most people lack psychological defenses most of the time to begin with, so if you can somehow elicit emotional responses to your message of a higher morality, even folks with robust intellectual armor will be vulnerable to your hype. You are best off choosing a company that is in an industry or has a product/service that can be construed as doing good for the world, e.g. a "green energy" company like Tesla could be utilized as a hype vehicle for a "war against global warming." It is you and your shareholders/customers versus stodgy old oil companies and dirty, polluting fossil fuels. If you have a cancer diagnostic product, the message is it is you and your investors versus cancer....versus the icy grip of Death itself. Your company mission and hype-inducing shareholder rallying cry is to "eradicate cancer." Think of the possibilities and positive moral implications. These sorts of "fights" trigger the masses to invest based on emotional reasons rather than empirical ones, which is precisely what you want when your company will never actually generate cash.

Observance of the Law:

Exact Sciences: “Our Mission: To help eradicate colorectal cancer."

Despite Exact Science's producing an inferior, more expensive product in a crowded diagnostic field, CEO Kevin Conroy has manifested an army of mindless surrogates who defend his nest egg with impassioned garble that neglects any kind of empirical evidence or discussion on valuation all because the company mission and investment thesis are buttoned down to a bite-sized one-liner that tugs at emotional heart strings. Even if you are not out to diagnose cancer, there is hope for you to "Pick a Fight" no matter your industry. For example, even Spencer Rascoff at Zillow, which has a third-rate real estate information website that is often outdated and riddled with inaccurate information, has articulated a fight that becomes about helping improve market transparency for consumers to find a "place for their life to happen."

Keys to the Law:

Like all other Laws of Hype, style matters infinitely more than substance. When thinking about implementing Law #3, you will realize how important Law #1 is, as you must first delude yourself into thinking you actually are doing good for society, even if in reality you are causing mass mis-allocation of capital away from truly innovative products and services who are not as good at hyping their prospects. Your Fight or Ideal must be simple, e.g. Exact Science's "eradicate cancer"--people won't swallow it unless it is simple and requires very little mental effort.

Interpretation:

Worried about global warming and the sustainability of life on Mother Earth? Buy a Tesla Model S, a $100k, 3,600 pound luxury sedan that is charged by fossil fuel powered utilities...but doesn't use gasoline.
"The overriding goal of Tesla is to accelerate the advent of sustainable transport." - Canned "stand for ideal" line of hype that Elon Musk says every chance he gets. Teslas cars are extremely unfriendly for the environment over the life of the car, so while every bicycle manufacturer and train company has done immeasurably more for the "advent of sustainable transport," their CEOs will not go down in history as a "greenie" legend or Laws of Hype Hall of Famers.
People want to feel like they belong in your group and on your side of the moral issue with the implication that many others do not belong. We all need an enemy to pinpoint to blame for our frustrations--give people a moral fight to fight..an outlet for their frustration.

Without a doubt the best industries that will help you create a message of higher morality or image of saving the world would be biotechnology and anything green related. There is a reason these areas experience repeated bubbles in quick succession. It is because they make investors feel so warm and fuzzy inside. For biotech especially, any attempt at valuation is based on intangible things that are years away from fruition, while in the interim investors can dream big.

There is a training montage scene in Batman Begins that captures the essence of Law #3:

Henri Ducard “…if you devote yourself to an ideal, you become something else entirely.”
Bruce Wayne: "Which is?"
Henri Ducard: "Legend, Mr. Wayne."

And in Man of Steel:

"The symbol of the House of El means "Hope". Embodied within that hope is the fundamental belief in the potential of every person to be a force for good. That's what you can bring them...You will give the people an ideal to strive towards."

Authority:
Exact Sciences, Kevin Conroy:

"And it's an important disease. It's a number 2 cancer-killer. It's number 3 in terms of overall incidents. That's despite all this screening that goes on today...This is a multi-billion dollar global opportunity. It meets a massive need in the market and we're starting with a 100 person sales force which will grow over time. Our mission as a company is to play a role in the eradication of colon cancer. This is something that can be achieved." - Conory, Cannacord Genuity Growth Conference, August 13th, 2014.

0 Comments

LAw #2: Choose an industry with a large total addressable market

8/12/2014

0 Comments

It is paramount you choose a hype-vehicle that has limited (or no) current revenue and has an unproven business model, but has seemingly large revenue potential.

Throughout most of history a company’s stock performance has been linked to its intrinsic value creation, or at least its intrinsic value creation potential. Every few years, the market gets worked into a speculative frenzy with stocks often separating from any semblance of economic reality or intrinsic value creation potential as a mass of indiscriminate buyers blindly lever up and throw capital at story stocks. Often in these situations a new breed of “stock market genius” emerges, and they essentially have only two criterion on their checklist: a large total addressable market (TAM) and a rapidly rising stock price. So the metrics that begin to matter are not cash flow, not even revenue, but the perceived potential for revenue and a rising stock price (e.g. price momentum). Your goal is to tailor your message towards this genus of stock market speculators, of which there is an endless supply. Presumably if things are going well operationally, you would not need to hype your company’s prospects, but for the sake of this writing we will assume you are at least capable of admitting to yourself that you have little hope of true fundamental value creation.

We will also assume that your main goal is generating extreme wealth for yourself in a quick manner, in which case the best hype-vehicles will have limited current revenue, or preferably none at all so you can start with a small base and a completely blank slate. The hype-vehicle should be in a somewhat new industry, should have an unproven business model and should be perceived to have a large total addressable market. In this era where profitless, perceived secular revenue growth as an investing "theme" is one of the best performers, it is critical you learn to effectively hype your Total Addressable Market. When your hype campaign is just getting started, the more abstract your business strategy can be (hence less current sales), the better, for if you follow all of the Laws of Hype, an abstract blank canvas with a large TAM will allow investors of all kinds project some of their greatest hopes for humanity onto your equity valuation. If you are a company with no revenue, analysts and investors will not have much else go on so your valuation will be abstract to begin with, but if you can operate within an unproven niche you can substantially influence how investors will project your potential revenue opportunities. Another key to hyping your TAM is omit any mention of the competitive landscape, rather you should assume it is as if you operate within a "free market vacuum" and state that there is "no competition" in sight and therefore everyone can assume its open blue ocean all around you as sail smoothly into substantial market share. If you are directly confronted about the competitive landscape, downplay and deride your established competition as inferior and ripe for easy disruption.

Observance of the Law:

“The addressable market for residential real estate advertising is massive at approximately $12 billion annually, yet on a combined basis Zillow and Trulia have less than 4% share of this market.” – Spencer Rascoff, CEO of Zillow, Conference call for proposed acquisition of Trulia, July 28th, 2014.

The sell side's focus on the TAM for Zillow can be traced back to when the company had just gone public. From the Pac Crest Zillow initiation in 2011:

“The real estate market is a large opportunity. The U.S. real estate industry spent over $20 billion in advertising in 2010. The opportunity for Zillow to tap into the ad spending directed by the 1.8 million real estate agents and 266,000 mortgage brokers is just getting started and should fuel over 60% CAGR in revenue over the next three years.”

Zillow is also another master at getting the market excited about the TAM of other adjacent opportunities, this is from the more recent 2014 Macquarie initiation of Zillow:

“Mortgage and Rental adjacencies add ~$14bn of TAM – These small but emerging businesses for Z represent advertising TAMs (total addressable markets) of $11bn and $3bn, respectively. Penetrating each will hinge in part on Z’s marketing initiatives, but early signs suggest both can be solid complements to Z’s core “for-sale” marketplace. Our valuation framework assumes Z’s share of Rentals reaches ~18% and Mortgages reaches < 4% by 2024.”

Zillow has hyped up adjacent TAMs so much so that now “these small” businesses for Zillow are somehow 55% larger than their core business ($14 billion in combined TAM versus $9 billion core opportunity used by Spencer on the latest conference call). To show you just how important hyping up the TAM is, often a price target and valuation are based “primarily” or entirely on an assumed penetration rate of all TAM, and then Price/Sales ratio gets slapped on that revenue opportunity. Again, from the recent Macquarie initiation on Zillow:

“Valuation: Our US$164 target is based primarily on a long-term market penetration analysis.”

Here is another great example from Exact Science's COO, Maneesh Arora, at the Goldman Sachs Global Healthcare Conference, June 12th, 2014:

"…which lead to just this tremendous market opportunity..there [are] 80 million people that are in this addressable population in the US. And if you look at the population demographics, they’re between 4 million and 5 million people turning 50 every year, right? So, we think that we keep our focus on that and there’s plenty of market for that.”

A few years earlier, when the investment opportunity was more abstract, the total addressable market was even bigger, to wit: “Our focus on early detection of colon cancer presents a sizable market opportunity…The population of those who should be screened based on age, medical history and other factors is roughly 90 million. Based on three and five year screening interval assumptions and assuming an achievable 40% penetration rate the annual colon cancer screening market is more than $0.5 billion.” Kevin Conroy, August 12th, 2009. Fast forward all the way to 2014 and the total addressable population they tout is 10 million smaller, the assumed penetration keeps coming down, yet the revenue opportunity has gone up by at least 100% as sell side analysts have $1 billion+ revenue run-rates modeled in just a few years out. As recently as today (August 12th, 2014), Kevin Conroy called the revenue potential for Cologuard a "multi-billion dollar US opportunity" and a "multi-billion dollar global opportunity." This is the type of progression you should follow to hype your growing TAM: $500 million..to $1 billion, to multi-billions.

If you tout the sheer size of your TAM, regardless of how you derive those estimates or the validity of your logic, the revenue assumptions can take on a life of their own as people’s imaginations run wild. What is most important is to reiterate how large the TAM is over and over again (repetition is key) regardless of faulty logic. Admittedly, it would be best if you are in an entirely new industry or market niche where there is no established TAM, because if it’s an unknown quantity you can do your best to mislead investors and shape the perception that it is actually much larger than economic reality it will prove it to be. Of course, being in a new industry is not a necessity to follow this Law of Hype. Take Exact Sciences or Tesla, for example. They both have numerous well established competitors in their respective industries (cars and colon cancer diagnostics) which are both very mature industries. In both cases, management cites the TAM and investors just assume they will capture meaningful market share with little regard for better and cheaper products already available on the market. It would be even better if you could choose a market where the TAM will grow. If you sense that your stock valuation has priced in the entirety of capturing the TAM you have been hyping for a while, you must come up with ways to increase the perceived TAM by talking about different verticals and adjacent market opportunities. For example, if you are Tesla and the analysts’ DCF models have maxed out on your luxury sedan EV market opportunity, you must then get them excited about all the other possibilities: SUVs, entry level sedans, minivans, buses, trucks, airplanes, flying cars, personal spaceships, jet-packs, scooters, etc. If you are EXAS, you must expand beyond the US borders and being to cite your efforts to capture the even larger global TAM. You must begin to talk about other molecular diagnostic screens you can come up with for other cancers that arise in the GI tract, etc. After all, your goal is to eradicate cancer entirely so why stop with colon cancer?
To wit:

Raymond A. Myers, Analyst, Alere Financial Partners: "Yeah. I'm asking, can you elaborate more on what your research projects are involved in stomach cancer?"

Kevin T. Conroy CEO, EXACT Sciences Corp.: "Let me say that our order of priority is most likely going to be pancreatic and esophageal cancers, with stomach cancer being a tremendous opportunity in a limited part of the world initially. In Korea, there's a huge stomach cancer screening program, national screening program that already exists. China, stomach cancer is a big problem. Japan, stomach cancer is a big problem. In fact, a number one cancer killer in some of those regions. So our current platform technology and markers that we've identified in our collaboration with the Mayo Clinic would potentially be utilized and readily adopted to the platform. In terms of the real – the greater opportunity both in the U.S. and globally, pancreatic cancer screening and diagnostic is the high priority, and esophageal screening and Barrett's esophagus screening and diagnostics is the second high priority. We'll talk a lot more about that as we go forward. But remember that we invested millions of dollars into a automated platform and millions – all together, tens of millions of dollars in the technology platform, the chemistry platform, the DNA extraction platform, the marker development. We haven't talked about that much over the last five and a half years. It's there. It's real. And it's applicable to other disease states and we think we're way ahead of where other people are. We will start to talk about our plans a little bit more as time goes on. We have a dedicated team that is focused on this, from marketing project management and most importantly, R&D and clinical, be in the Mayo Clinic. So we think we have some exciting things to talk about just not right now.”

Even way before your repulsive, inferior and more expensive products have hit the market and flopped, it is recommended you follow Exact Science’s lead and begin pumping potential products that are years and years away from commercial development when you've already gotten credit for capturing the bulk of your core TAM. Keep the sense of momentum of a growing TAM going, and whatever you do don't play all your cards at once.

Another biotech firm that has executed Law #2 flawlessly is Raptor Pharmaceuticals, true masters of hyping an extremely limited TAM and adjacent TAMs. Raptor makes a me-too drug with 3x as many adverse side effects for patients for a rare disease known as cystinosis. Cystinosis is an easy to diagnose rare disease with a very steady number year after year of known inflicted persons in the US (~500 the last four years in a row). They are over one year into launch of their sole drug Procysbi, and surprisingly having captured much of the available US market with revenues still ~27% of the assumed peak in sales. With no end in sight to Raptor's significant cash incineration, investors have been conditioned to not only assume 80% market share capture versus the existing drug that cost 1/20th as much, but then also have hockey-sticked the presumed growth in available cystinosis patients in the US and globally by a healthy high single digit CAGR. into perpetuity. Raptor has a supposed solution in search of additional problems and the sell side gladly plays along hoping to cash in on future equity offerings that will be needed to shore up the balance sheet.

"We believe the clinical data, orphan drug status, and patient need for a better tolerated/effective therapeutic option support high Procysbi patient uptake and ~$235MM peak revenues in NC worldwide. RPTP is developing DR cysteamine for the treatment of NASH (nonalcoholic steatohepatitis), which could be as large or larger an opportunity considering its close association with diabetes and obesity." - Leerink Swan on Raptor, August 7th, 2014 earnings recap.

Transgression of the Law:

“While we are pleased with the record bookings, we remain even more excited about the opportunity ahead. Despite our growth and run rate, we still only represent a tiny fraction of the addressable market for real estate advertising. Of the $27 billion spent annual by the category that borrell Research identifies approximately $9 billion is spent on advertising by residential real estate agents, brokerages, and homebuilders. With our current run rate, we are on track to capture just over 2% of the market this year, which highlights just how early we are in the shift from offline to online and the sizable opportunity and runway we have ahead of us.” – Spencer Rascoff, Zillow CEO, Q2 2014 Earnings Call on August 5th, 2014, a week after the quote from Spencer above in Observance of the Law.

As pointed out above, Spencer was on the merger call just a week earlier citing a $12 billion revenue opportunity. A few days later he then throws out $27 billion, oh now wait, its just $9 billion seven days later. Spencer rarely makes missteps in Zillow's strict adherence to the Laws of Hype, but he made a clear mistake here by citing a smaller TAM than just a week before. Also given that Zillow is much larger than Trulia yet only running at 2% penetration of this opportunity, I am not sure how the combined companies were at 4% of the market a week ago when the TAM was 33% higher at $12 billion.

Interpretation:

Spencer's heart is in the right place by focusing the market on the "exciting opportunities" and "long runway" ahead in their "under-penetrated" TAM, but he is very inconsistent with his numbers. If you are going to be inconsistent in what you say about the TAM, it is crucial your number is steadily climbing, not shrinking--especially within one week's time frame. Try to make sure your management team and IR representatives have a unified hype message to deliver with regards to your TAM and when you find an official sounding source with a higher estimated TAM, or come up with an innovative new methodology that derives a higher number and has at least a facade of reasonableness to it, switch over to the higher number when your stock is floundering.

Authority:

Marc Benioff, CEO of Salesforce.com, plus other Salesforce executives.

Marc Benioff is the undisputed King of the TAM, especially guiding for a steadily growing TAM over the years.

From a recent Salesforce.com earnings call:

Samad Samana, FBR: “…how penetrated is the core Sales Cloud outside of the United States?"

Marc Benioff, CEO of Salesforce.com: “I really think International remains a huge upside opportunity for Salesforce. We’ve invested very heavily in the United States market, which was a very good decision because it is the mega-market for enterprise software…we have a lot more opportunity internationally.” Translation: we’ve lost a lot of money in the US, we’ve got a long runway of losses coming internationally. Benioff continues: "We believe that there is huge opportunity in the enterprise, huge opportunity in the mid-market, huge opportunity in the small market."

Salesforce.com has been pumping the TAM in an expert way since their early days. Here is a great passage to study and refine for your own purposes from George Hu, CRM's COO at the Wells Fargo Technology Transformation Summit on April 4th, 2012:

"I think the most important thing to understand about salesforce.com is that we – because of this massive secular shift that we're riding, that we just have tremendous distribution opportunities everywhere in the world. And that we are fundamentally a distribution constrained company, which is why we're investing so much in distribution. And that we're very different than the other traditional enterprise software companies because we – our mantra we like to say is, like, a third of our business is small business, a third is medium, a third is enterprise and that's very different. We have in some ways – at least right out of the chute doubled or tripled the total addressable market that most of these companies have in the traditional old days. And so that just means that in the markets that we already have some – you would think of as the more mature markets, we just still have a lot of opportunity, like we see tremendous opportunity all over the world but even in Americas, which is kind of our home base where we just see tremendous return to that distribution investment and we're just pouring it on. There is just – I think we've really hit the tipping point in the Americas...there is so much energy there. And so, I think that's one of the big drivers actually of why Americas is just growing so quickly is that's hit that tipping point. And, I think that – in terms of the rest of the international strategy...I think you're going to see some exciting – even more exciting frankly results there."

Let's travel back in time to May 2012 when Adam Holt from Morgan Stanley did a bottom up analysis trying to estimate the total true number of Salesforce.com users. He had the insight to include jobs such as dental assistants, legal secretaries, and bank loan officers as potential users of CRM and came up with an added 15 million potential users to Salesforce's TAM.

In the report's opening paragraph Morgan Stanley says, "Industry analysts currently peg the market at $5 billion, we believe the market could be 4-7x larger or $23-38 billion." Holt used this bottom up analysis to raise his price target and raise estimates. Never mind their adjusted EPS estimates using the flawed analysis derived a $2.16 2014 EPS estimate, with consensus estimates now a full 84% lower (consensus now sits at 34 cents adjusted EPS for 2014 and -42 cents for GAAP EPS) than that as of this writing. (source: Morgan Stanley report: Bigger Sales Potential in Salesforce, May 9th, 2012. Earnings estimates source Bloomberg)

Now fast forward to November 7th, 2013 to another Morgan Stanley report from Keith Weiss, who swallows the hype management has spoon fed him and finds a way to peg the TAM at a measly $100 billion. The report breaks it down as follows:

"Sales Cloud: $23-39B opportunity based on 49-53 million potential sales seats worldwide. This suggests ~6% penetration of the opportunity by Salesforce.com today (at he midpoint) versus industry analyst average estimates of a $5B market, implying an average 33% share.
Service Cloud: $6-11B opportunity based of 10-13 million potential customer service seats worldwide. The midpoint of our estimates suggests ~7% penetration of the opportunity today, below industry analysts’ average view of 13% share by Salesforce.com.
Marketing Cloud: $30B+ opportunity based on a percentage of digital marketing activities related to external spend on technology vendors. Salesforce.com has penetrated <1% of this opportunity to date.
Platform Business: $30B+ opportunity based on 15-35% potential penetration of the global base of 400-600 million information workers. Our analysis suggests <2% penetration of the opportunity today versus industry analysts suggesting an average 8% share today." (Source: Morgan Stanley report, Salesforce.com, Stronger for Longer $100B+ Opportunity Ahead.)

As you can see, the perceived increased TAM is likely the single most important hype-metric driving CRM's stock price and here once again it resulted in a stock upgrade and 21% price target hike. If possible, pumping your TAM should start in your S-1 filing, but if you are just now taking over a company it's not too late to begin hyping your TAM, no matter how mundane your industry.

Recommended further reading: Any Salesforce.com Investor conference and earnings call transcripts or company presentations. Review Raptor Pharmaceutical Corp's conference call transcripts for how to hype a very constrained TAM. Review Exact Sciences conference transcripts on how to hype an inferior product in a competitively crowded landscape.

0 Comments

Law #1

8/8/2014

0 Comments

Law #1: Fool Yourself to Fool Others
You must first delude yourself before you try and fool other people.

It is absolutely critical that you delude yourself first before you try and fool other people. A bullshitter is not necessarily the same thing as a liar. A bullshitter is not necessarily knowingly lying, but rather saying things to suit their purpose, without any care if what he says is true as he knows in the modern day and age of the internet there is zero accountability for his misleading words. In order to genuinely sell your claptrap vision, you must first delude yourself entirely into believing that you and your products/services are gifts from god. There is no exception to this Law of Hype--it is Law #1 for a reason--for if you do not truly believe (at least in the beginning), your entire hype campaign can be compromised, or worse yet, never get off the ground. There is a telling scene from the psychological powerhouse of a sitcom, Seinfeld, whereby George tells Jerry: "Remember, Jerry, it’s not a lie…if you believe it." Take this statement to heart and convince yourself of your grandiosity. Investors need to see the sparkle in your eye for if you do not exude confidence the sheep will move on to someone else who has much more false self-confidence. You must fool yourself first and internalize your hype--live it and breathe it...every...damn...day.

Observance of the Law:

Tesla CEO Elon Musk laughs at the mention of BMW EVs. Musk also laughs at BYD's low end EVs.

BMW meanwhile has sold over 2 million cars in the last four quarters, while Tesla has sold a combined 26,428. BMW has spent over $4.16 billion on R&D in the last year, while Tesla has spent $314 million. BMW's trailing twelve months R&D is equivalent to 171% of Tesla's sales, yet Tesla is dismissive of BMW and their history of innovation in luxury cars. The Chinese automaker BYD is literally everything that Elon Musk wants Tesla to be: they have multiple electric vehicles, selling half a million cars a year, they are a fully vertically integrated battery manufacturer, have energy storage products, etc., yet Musk scoffs at the mention of them and their smaller enterprise value.

Musk has publicly stated that Tesla has the best autonomous driving technology and team of engineers, promising a semi-autonomous vehicle on the road within three years. Unfortunately for Musk, almost every car manufacturer already has such features available (like reactive braking and partially autonomous cruise control) in models for sale now, including Mitsubishi, Mercedes, VW, Volvo, Jeep, Acura, Lexus, Jaguar, Cadillac, Chevrolet, Porsche, Bentley, Audi, BMW, Infiniti, Subaru, Hyundai, Kia, etc. So pretty much every other auto maker in the world is a few steps ahead of Tesla in terms of adaptive cruise control and multi-sensor safety systems. VW has all electric cars that can entirely self park themselves, acting a personal valet through a smart phone app. It takes true self delusion to be so blatantly ignorant of the competitive landscape and/or downplay it to such a degree.

The capability of genuinely giggling like a school girl at the mention of a competitive threat, on earnings conference calls or Bloomberg interviews no less--this is the type of extreme self delusion of your superiority that is required to truly enact one of the greatest hype campaigns of all time.

Authority:
Elon Musk: Elon Musk's self delusion regarding the Tesla Model S being a green car or a good deal for consumers is of such epic proportions, it is likely unmatched by any current CEO. "His greatest asset is to take this...big, big dream and make other people think that it's true." - Max Chafkin, journalist, introduction to Bloomberg Risk Takers profile on Elon Musk, published June 10th, 2014.

0 Comments

Forward>>

"Without promotion something terrible happens...nothing!" -P.T. Barnum

Law #6: obscure data

Law #5: Emphasize Meaningless Metrics

Law of Hype #4: Tell a Really Big Lie

LAW #3: Stand for an ideal

LAw #2: Choose an industry with a large total addressable market

Law #1

Author

Categories

Archives