Demand Media (DMD) – The Times They are a Changin’

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“This is the most important and exciting change in the internet in a long, long time. Maybe since the beginning of the modern internet.”

– Ben Fried, Google’s Chief Information Officer (source)

Investors should take note every time a Google exec goes on record saying they are “incredibly excited” about something because most of the time, there’s a good reason for it. Which is why when I heard the above quote at Google’s I/O, I decided to dig in. And what I found was a truly great business being ignored by the market with a value creation catalyst just a few trading days away.

Let’s start at the bottom by walking through the modern domain registry business. There are 4 main constituents in the domain registry value chain:

Here’s a view of the marketplace:

Domain Registry Process

In terms of who gets what, the economic breakdown of every .com sold looks like this (average sales price is about $10 today):

As you can see, the closer you are to ICANN, the more value you capture. The registry operator is clearly king, keeping 78% of the economics from every .com sold.

Boston Beer (SAM) – Facing Annihilation?

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“Let’s take the criticism, that the scale brewers have been slow to innovate and to bring exciting, fresh and new brews. That’s probably correct. The reality, though, is we’ve recognized that and we’re moving very quickly.”

– Alan Clark, CEO of SABMiller, the world’s second largest brewer (source)

When I think about the competitive forces moving against SAM, I can’t help but consider the parallels to the samurai just before the Battle of Shiroyama (here).

Far outnumbered in size and might, SAM’s business today appears just as vulnerable as Saigō’s head in 1877.

I’ve spent many hours racking my brain and the only conclusion I can come to is this one: this will not end well for SAM shareholders.

But like all humans, I am fallible. So I am writing to seek out different opinions on SAM. Please tell me where I’m wrong (previous notes here).

Lightstream (LTS) – 3x. Eventually.

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Say you own a house. And your neighbor across the street owns a similar house. Heck, let’s just say the entire neighborhood is made up of similar homes.

Last weekend, the neighbor across the street sells her home for $150k. Zillow’s Zestimate also values everyone’s house at $150k – everyone, that is, except yours. Your home, although nearly identical, is inexplicably valued on Zillow for $50k. You’re confused, but it doesn’t really matter because you’re never going to sell it for $50k. When you go to sell, you’re going to get what every comparable home in your neighborhood gets. That’s how the real estate market works.

That’s how every (mostly) efficient market works. Eventually.

But in-between today and “eventually”, anomalies can pop up. And these anomalies create fantastic investment opportunities.

Case in point: Lightstream (LTS; previous note here).

Accretive Health (ACHI) – A Transformational Hire

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A week ago, I sent out a note to my network highlighting Accretive Health as a special situation (posted yesterday here). In fact, I called it “the definition of special” because of all the issues the Company has endured over the past three years. In spite of those issues, I concluded that the Company still had a pretty darn good business. And the negativity surrounding the stock would erode as the investing community became confident that the problems were getting fixed.

So imagine my surprise yesterday – a mere seven days later – to learn that ACHI was able to land one of the most respected, influential people in healthcare as their new CEO (here). I was so surprised, in fact, that I almost spit my coffee onto my keyboard. Emad Rizk is so credible and so respected that I’m going on record stating: The hire of Emad Rizk is a transformational event for this Company. 

Here’s just a few of Emad Rizk’s accomplishments over the past 25 years:

In my mind, the hire of Emad Rizk completely blows up the bear case. Any bear case. And investors that continue to regard Accretive Health as untouchable are going to be proven very, very wrong.

Accretive Health (ACHI) – The Definition of “Special”

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Accretive Health (ACHI) is the definition of “special”. “Special” is in quotes because in this case, special is not a good thing. Actually, the Company is a complete mess. Just take a look at what’s happened over the past three years:

So to recap: We have a company with a lameduck CEO, no financials, trading over the counter. Now can you understand why I call this company “special”?

After reading all this, you might think the business is permanently impaired. You’d be wrong.