MONEY stocks

3 Companies That May Not Last Through 2015

RadioShack consumers electronics store, Falls Church, Virginia.
RadioShack consumers electronics store, Falls Church, Virginia. Saul Loeb—AFP/Getty Images

Watch these companies closely this year.

For more than six years now, the stock market has defied naysayers in a bull-market run that has pushed major-market benchmarks to record levels. Yet no matter how strong the stock market is, you can always find pockets of weakness among certain companies that simply haven’t lived up to expectations. Indeed, in extreme cases, some companies find that it no longer makes sense to stay in business, either breaking themselves up in major asset sales or declaring bankruptcy. The result is often a plunging stock price that leaves shareholders with major losses.

To help you identify some potential danger areas, three Motley Fool contributors picked companies that they believe might not live to see the end of 2015. Their views certainly aren’t a guarantee of failure for these stocks, but they nevertheless believe that you should watch these companies closely before you put your investing dollars at risk.

Jeremy Bowman (Radio Shack)

Radio Shack RADIOSHACK CORP. RSH 3.3493% has been a fixture in electronics retail for over a generation with over 4,000 stores nationwide, but this year could be its last. A combination of declining sales, steep losses, and pressure from its creditors may force it into bankruptcy and liquidation.

The company still brings in substantial sales at more than $3 billion over the last twelve months, but its share price has fallen all the way to $0.39 as of Monday’s close, valuing the company at $39 million, or slightly more than a penny for every dollar in sales.

Radio Shack was already in trouble this time last year with same-store sales falling by double digits, but the company’s hopes for a turnaround took a sudden turn for the worse when creditors rejected a plan to close 1,100 stores last spring, claiming that doing so would violate debt covenants. Since then, cash has evaporated, and the Shack was left with just $62 million in liquidity as of its third quarter earnings report when it turned in an operating loss of $114 million.

Since then, Radio Shack has resorted to what seem to be desperate moves, suspending employee 401(k) contributions and, in December, bringing in its third CFO in just four months. Its marketing chief also quit in December, during the crucial holiday selling season, a further sign that the company’s demise could come even sooner than expected.

The retailer’s moment of truth should come this Thursday, when the deadline it has with lender Standard General arrives. Radio Shack must prove it has $100 million in liquidity in order to implement a financing package with Standard General agreed on in October. If Radio Shack is unable to secure additional funding, the company’s prospects look essentially dead. Moreover, even if it shows up with the $100 million, that’s no guarantee it will remain viable through the end of the year.

Bob Ciura (Aeropostale)

Aeropostale AEROPOSTALE ARO 2.952% might not make it out of 2015 alive, even though shares of the teen retailer jumped more than 20% on January 8 after better-than-expected holiday sales. Aeropostale said comparable holiday sales fell 9%, better than last year’s 15% decline. But the results still signify this is a company in severe decline. Shares of Aeropostale lost nearly three-quarters of their value last year due to collapsing sales, and management’s plan to turn the company around mostly involves shuttering stores. The company plans to close as many as 240 Aeropostale stores and all of its P.S. children’s concept. Not only are total sales falling, but sales per square foot are falling as well, which means store closings are not likely to restore growth

Aeropostale announced a smaller-than-expected loss for the fourth quarter. Management expects the company will lose $18 million-$23 million in the quarter, down from a prior forecast of $28 million-$34 million. Still, this hardly seems reason to celebrate. Over the past three quarters, Aeropostale lost nearly $200 million, approximately double the loss from the same period one year ago.

The teen fashion landscape changes very quickly, and companies that fall out of favor find it hard to catch up. While Aeropostale suffers the effects, investors shouldn’t touch this company that might not survive through 2015

Dan Caplinger (Sears Holdings)

One of the most often-chosen stocks for a potential implosion is retailer Sears Holdings SEARS HOLDINGS CORP. SHLD 2.9868% , which has struggled for years to navigate difficult conditions in its niche of the big-box retail segment. The company is on pace to lose money for the fourth year in a row, and restructuring charges and asset sales that for most companies are extraordinary events have become commonplace for the operator of Sears and KMart stores.

Sears is infamous for its long string of spinoffs, with last year’s Lands’ End LANDS END INC COM USD0.01 LE -1.935% IPO having been one of the more successful of its former parent’s corporate moves. Many believe that CEO Eddie Lampert’s primary strategy has been to unlock the value of Sears Holdings’ assets through such moves, with the eventual goal of leaving the money-losing retail business as a used-up husk. Yet many have been surprised at just how long Sears has managed to stay in business, and a recent hacker-attack against the company’s KMart division was just another problem that the company will have to face in trying to attract shoppers.

It’s entirely possible that Sears Holdings shareholders could receive further valuable distributions on their stock through spinoffs or other corporate moves. Yet the odds of Sears Holdings continuing in anything like its current form grow smaller every day.

TIME Retail

Online Marketplace Etsy Is Going Public

Etsy signage at the Brooklyn Beta conference in Brooklyn, N.Y. on Oct. 12, 2012.
Etsy signage at the Brooklyn Beta conference in Brooklyn, N.Y. on Oct. 12, 2012. Bloomberg—Getty Images

Etsy could bring a little bit of Brooklyn hipster to the public market this year

Etsy, the online seller of handmade crafts and vintage goods, is planning to go public as soon as this quarter with plans to raise $300 million, sources told Bloomberg News.

If the Brooklyn-based site rakes in that amount of cash, it would be the biggest New York tech IPO since 1999. The last time a New York-based tech company garnered that kind of a valuation was the dot-com boom when high valuations benefited listings from TD Waterhouse Group and Barnesandnoble.com, the e-commerce spinoff of the bookstore chain.

Etsy was started by painter and carpenter Rob Kalin in 2005. The multi-talented artist was looking for a way to sell his hand-built goods and started the online exchange. The company now has nearly 26 million items listed on its site–anything from vintage champagne coups to handmade dog collars.

Etsy, which has been valued at more than $1 billion, brings in its profits by charging sellers 20 cents to list products and then takes another 3.5% commission from each item sold. It also generates revenue from advertising and payment procession. In 2013, the site reported $1.35 billion in gross merchandise sales, according to its website.

Goldman Sachs and Morgan Stanley are working with Etsy on its IPO, and the company is likely to file a prospectus this month with more financial details, sources told Bloomberg.

An Etsy spokeswoman declined to comment.

This article originally appeared on Fortune.com.

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TIME Companies

Cloud Storage Company Box Is Almost Ready to Go Public

Company could be valued at close to $1.6 billion

Cloud storage service Box is almost ready to go to the market.

The tech startup filed an amended IPO Friday pricing its shares between $11 and $13. At the high end, the IPO would raise as much as $187 million for the company and value Box at nearly $1.6 billion.

Box had originally filed for an IPO in March 2014 but shelved plans for going public last year amidst an overall downturn in tech stocks. The company is not yet profitable, having lost $121 million in the first nine months of 2014 and $125 million in the first nine months of 2013. Revenue for those periods was $154 million and $85 million, respectively.

Box is facing pressure from several much larger competitors, including Dropbox, Google and Microsoft, who have all spent the last year or so offering increasing amounts of cloud storage for lower prices.

MONEY Food & Drink

What You Should Know About the Shake Shack IPO

Shake Shack in Madison Square Park in New York City.
Andrew Burton—Getty Images

Should you get in on a hot new restaurant IPO that's almost guaranteed to generate double-digit revenue growth for years to come? It's tempting in theory, but no-brainer IPOs don't always pay off.

Last week, Shake Shack, a popular New York City-based burger joint, announced that it has decided to go public. If the reception to the news on Twitter and throughout the financial media is any indication, it will be a highly coveted affair.

Founded in 2001 as a hot-dog cart in New York’s Madison Square Park, the concept has expanded to 63 physical locations, 32 of which are licensed to domestic and international operators. Meanwhile, its systemwide sales have gone from $21 million in 2010 to $140 million in 2013.

It goes without saying that there is phenomenal potential for a company like this. Yet determining whether such potential will translate into outsized returns for early investors is far from obvious.

According to Benjamin Graham, the father of value investing and author of The Intelligent Investor, the answer is generally no:

Our one recommendation is that all investors should be wary of new issues — which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased.

The data on IPOs

While the data on the performance of IPOs isn’t conclusive, it tends to support Graham’s warning. Over the past five years, for instance, a composite of IPOs compiled by Renaissance Capital has returned a total of 124%, compared with the S&P 500’s 132%.

And data curated by Professor Jay Ritter at the University of Florida leads to the same conclusion. Between 1970 and 2012, Ritter found that IPOs underperformed similarly sized publicly traded companies in the first, second, third, and fifth years after listing. The only outlier, for reasons not immediately apparent, was the fourth year, in which the cumulative return of newly listed companies exceeded that of their similarly sized competitors by 1.8%.

This isn’t to say that the data speaks unanimously against IPOs, as there is conflicting evidence that suggests the opposite. Most notably, an IPO index designed by First Trust, a money management firm headquartered near Chicago, has returned a total of 150% since 2006 versus the S&P 500’s total return of 92%.

And, of course, it’s hard to ignore the companies that have gone public and seen their shares soar. Digital-camera maker GoPro, which listed in the middle of last year amid its own flurry of media attention and excitement, serves as a case in point. Since opening at $28.65 a share on June 26, its stock has more than doubled in price and currently trades for more than $65 a share.

The issue with IPOs, in turn, isn’t that none of them pay off. As GoPro and others have demonstrated, some do. The issue instead is that they aren’t designed to do so — or, at least, not for the individual investor.

IPOs and the lemon problem

In the first case, you have the so-called lemon problem. When a company goes public, the people selling their shares know a lot more about it than you do. It’s akin to buying a used car, where the seller has intimate knowledge about the vehicle’s infirmities while the buyer must decide after only a brief test drive and cursory inspection.

Fueling this situation is the fact that many companies going public nowadays were previously controlled by private equity firms. That matters, because the fundamental business model of such firms is to extract the value from a company before unloading its shares onto the public markets.

Caesars Entertainment CAESARS ENTERT CP COM USD0.01 CZR 2.916% is a textbook example. When the casino giant was taken public by its private equity handlers in 2012, it was laden down with $20 billion in debt. After subtracting intangible assets, Caesars was left with a tangible book value of negative $7 billion.

Fast-forward to today, and Caesars’ interest payments have become unsustainable. In the first nine months of last year, servicing its debt consumed nearly half of the casino’s total gambling revenues, leading to a $2.1 billion loss from continuing operations. Thus, it’s no coincidence that Caesars is on the verge of putting its largest operating unit into bankruptcy as soon as this month.

Stacking the deck against individual investors

But even if the lemon problem wasn’t an issue, individual investors would still be at a disadvantage when it comes to IPOs: Investment banks, which shepherd companies through the process, have a vested interest in maximizing the price of a company’s newly issued shares, regardless of value.

Taking companies public is a lucrative and competitive business on Wall Street. And while investment banks wouldn’t admit to it, one way they compete against each other for that business is by proffering the services of their research analysts — that is, the people who are tasked with educating investors about the value of publicly traded companies.

A recent enforcement action by the Financial Industry Regulatory Authority gave a rare insight into that process for investors. At the beginning of last month, FINRA fined 10 banks between $2.5 million and $5 million each for “allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys “R” Us”.

In effect, the investment banks told Toys “R” Us and its private-equity owners that, if awarded the business, their research analysts would publish favorable reports about the retailer’s value to sway investors and, by doing so, potentially inflate its stock price. It was the same thing many of the same firms did around the turn of the century, when their analysts pumped degenerate Internet stocks such as Pets.com and Webvan.com.

The net result is that it’s difficult for an individual investor to get an objective assessment of the value of a newly listed company. And it’s for this reason that investing in them calls for, in Graham’s words, a “special degree of sales resistance.”

The unfavorable timing of IPOs

Finally, I would be remiss if I didn’t at least touch on the issue of timing. It’s common sense that companies prefer to go public when stock valuations are high, as opposed to when they’re low. By doing so, the sellers are more likely to get a price that’s favorable to them and, concomitantly, less favorable to individual investors.

The data bears out that reality. In the lofty market of 2005 to 2007, an average of 200 companies went public each year. The number fell to only 31 after stocks plunged in 2008. Since then, the annual IPO volume has steadily increased with the market, topping out for the moment in 2014 as stocks soared to unprecedented heights.

In sum, when you add timing to the lemon problem as well as the conflict-of-interest issue that leads investment banks to inflate the value of newly issued stocks, it should be obvious that investing in this area is, to put it mildly, fraught with peril for the individual investor.

Getting back to Shake Shack

Of course, none of this guarantees that Shake Shack’s IPO will yield substandard returns for the early investor — relative to the broader market, that is. I’ve read more than one compelling analysis of its prospects. It’s a great business. It’s run by a restaurateur with impeccable credentials. Customers love it. And all of these things come through in the burger joint’s growth trajectory.

But at the end of the day, prospective early investors in Shake Shack would be smart to go into it with their eyes wide open. While it could be, and hopefully is, an outright bonanza for anyone who buys in, such an outcome would be in spite of the IPO process and not because of it.

TIME Social Media

For Twitter, Potential and Reality Are Increasingly at Odds

Twitter
The Twitter logo is displayed on a mobile device. Bethany Clarke—Getty Images

Here's why 2015 will be the most important year in Twitter's short history

Twitter has seen its stock rallying lately, but not for reasons the company would like. On Jan. 6, it shot up 7% on rumors activist Carl Icahn was buying a stake. Right before Christmas, it also rallied 4% on another rumor CEO Dick Costolo would step down.

Costolo has outlined a long-term vision for the company, but it’s the rumors of the plans others have for Twitter that moves its stock higher. That’s because there have been two Twitters for a while–the premier publishing platform the company could be and the one that always seems to be falling short of that potential.

There’s the influential company that breaks big stories, hosts large-scale debates and writes history in real time. And there’s the troubled company that can be found in Facebook’s shadow. There’s the stock that’s trading 40% above its offering price. And the stock that’s lost more than half its peak value.

There’s the startup that everyone doubted the first time they used it. And there’s the company that has become an addiction to many. There’s the social media site that has proven to be an indispensable platform for people in the media industry. And there is the social media site that draws naysaying predictions from people in the media industry.

There is the social network that some argued was unmonetizable, and the one that saw revenue double to $1.3 billion in 2014. There is the company that promises a decade of revenue growth, and the one that hasn’t shown an operating profit for years. There is the company that can boast 284 million monthly users and a half billion tweets a day. And the company with a measly 284 million monthly users, less than Instagram’s and a faction of Facebook’s.

But here’s the thing: As time goes on, the world has less room for two Twitters. It may well be that when 2015 comes to a close, there will only be one. The only question is which one will it be? Twitter the success story? Or Twitter the falling star?

There’s no question which Twitter Costolo wants to see survive. Over the past several months, Costolo has been working on a plan to boost user growth and engagement, convert logged-out readers into monetizable users, and insert more ads into Twitter feeds without driving away users.

The pressure to deliver on these goals is on. After the resignation rumors, critics emerged to call for his removal, including a Harvard professor who dismissed Costolo as “a consultant.” But Twitter has seen a lot of reshuffling in its executive ranks, and further instability in its leadership won’t help.

Besides, it’s not clear who would do a better job at growing Twitter right now than Costolo, who understands the devilish balance the company needs to maintain in order to keep growing without driving away its core users–a process that requires time. Facebook had nine years as a private company before facing the pressures to grow profits (and its first post-IPO year was a bummer). Twitter had only seven.

The tension that divides the two Twitters–grow users, but also grow revenue by showing them ads–is one familiar to social networks. Push too hard on one and the other vanishes. Facebook succeeded by building an inimitable place for friends to connect in non-public conversations. But Twitter isn’t Facebook. Like the “microblog” it started out as, it’s closer in spirit to Web 1.0 publishing–that is, a one-to-many format, only on a much richer, social venue.

The problem is, many people are reading tweets without setting up or logging into accounts. Twitter reckons this passive audience is 500 million large. Still more could be drawn in if a Twitter platform made tweets a part of other mobile apps. Costolo has plans to address these issues, by making it easier for passive users to build profiles and create instant timelines, and by rolling out Fabric, a Twitter platform that developers can easily drop into their apps.

Twitter is also vowing to boost the percent of ads in a Twitter feed from 1.3% of tweets to 5%, which itself could boost annual revenue to $5 billion. In my own feed, I’ve noticed ads are as high as 7%, or one in every 15 tweets, although none have shown up yet in apps like Tweetbot.

Twitter is quick to caution that such figures aren’t formal estimates but mere projections of a potential. And there’s that potential Twitter again, the one that never seems to show up in reality. Costolo has made a credible case for more time to let his plans push Twitter closer to that potential growth. Transitioning to a new leader, or merging Twitter with Yahoo or Google, would only delay a transition that is already short on time.

Moving too quickly to push ads onto Twitter could also drive away more active users. And that would cripple the best part of Twitter–the public forum where events like Ferguson protests unfold online, where debates flourish, where strangers discuss sporting or television events, and where celebrities, politicians and–yes–investors connect with the public. If Icahn does amass a large stake in Twitter, he will probably announce it on Twitter.

So 2015 is shaping up to be for Twitter what 2013 was for Facebook: a make-or-break year. Facebook managed to win over investors by delivering on its promise for growth. Twitter is reaching a similar crossroads this year, and how well Costolo delivers on his vision will likely determine which Twitter is with us come 2016.

TIME Markets

IPOs Raise $249 Billion in 2014 Amid Funding Frenzy

Dow Rises Over 400 Points Day After Fed Signals No Rise In Interest Rates
A trader works on the floor of the New York Stock Exchange in New York City during the afternoon of Dec. 18, 2014. Andrew Burton—Getty Images

Last year was a busy one for public offerings, even without Alibaba’s record-breaking listing

A company looking to raise money in 2014 didn’t have to look too far. Last year was the busiest for initial public offerings since 2010.

From Alibaba Group’s $25 billion IPO to much-hyped smaller listings, such as GoPro and Ally Financial, companies listing on the stock markets raised $249 billion worldwide, according to data collected by Thompson Reuters. Even without Alibaba’s record-breaking offering, last year was a standout period for IPOs.

IPOs picked up pace from 2013: about 40% more companies listed on public markets in 2014 compared to the year prior. They also raised more money. Leaving out Alibaba’s offering, which many agree is a once-in-a-generation kind of IPO, companies raised almost 36% more money year-over-year, according to the New York Times.

The booming market has led some analysts to speculate that it is inflated past realistic valuations, pumped up by overly optimistic investors. For instance, Lending Club’s December IPO valued the online lender at 35 times estimated revenue for 2017, which would put it on par with tech companies such as Facebook.

The public markets weren’t the only place to raise big bucks. The private market also saw big number sums, including Uber’s $1.8 billion fundraising round that valued it at $40 billion. Chinese smart phone maker Xiaomi and online home rental service Airbnb also raised huge sums that valued the startups at $10 billion or more.

Fundraising in both the public and private markets have been driven by a confluence of factors, including low interest rates that have pushed investors toward higher-growth opportunities and a skyrocketing stock market.

While no mega-IPO like Alibaba is set for the year ahead, there are some big-name companies that are scheduled to go public, including file-sharing startup Box and “fine casual” dining chain Shake Shack.

Other potential IPOs remain the subject of much speculation. Investors are watching startups such as Uber, Pinterest and Fitbit carefully, though none have yet indicated when or if they will list on public markets.

This article originally appeared on Fortune.com

TIME Fast Food

Fast Food Chain Shake Shack Files for IPO

A Shake Shack restaurant in New York City.
A Shake Shack restaurant in New York City. Bloomberg—Bloomberg via Getty Images

The burger joint has applied to list its common stock on the New York Stock Exchange under the symbol ‘SHAK’

Shake Shack, the burger chain started in New York City by restaurateur Danny Meyer, filed for an initial public offering Monday.

The chain calls itself the modern day “roadside” burger stand and operates 63 Shake Shacks around the world, including locations in London and Dubai. About half of those locations are company-owned and the remaining are franchised operations.

Last year the company brought in $82.5 million, and is on track to grow total revenues even further in 2014. Its same store sales growth was 5.9% last year, down from 7.1% in 2012.

The burger joint is aiming for an offering that could value it as high as $1 billion, according to previous reports. It has applied to list its common stock on the New York Stock Exchange under the symbol “SHAK.”

Meyer, who opened the first Shake Shack from a hotdog cart in 2001, is the chairman of the board and also serves as CEO of Union Square Hospitality Group, which oversees some of New York City’s top restaurants including Gramercy Tavern and Union Square Cafe.

J.P. Morgan, Morgan Stanley and Goldman Sachs are among the major underwriters for the IPO, according to Shake Shack’s preliminary prospectus.

Shake Shack opened 8 new domestic company-operated restaurants in fiscal 2013, and 10 domestic company-operated restaurants, and 12 international licensed restaurants, in fiscal 2014, the company said its filing.

Interestingly, the company cited “security breaches of confidential guest information, in connection with our electronic processing of credit and debit card transactions,” as a risk factor to the company as it expands.

A series of high-profile corporate security breaches at major retailers such as Home Depot, Staples and Target have left millions of customers’ credit card information exposed.

This article originally appeared on Fortune.com

MONEY Airlines

How Virgin America Plans to Take the U.S. Airline Industry by Storm

Virgin America Inc. President and Chief Executive Officer David Cush (C) celebrates the company's initial public offering after ringing the opening bell of the trading session with NASDAQ President and Chief Executive Officer Robert Greifeld (2nd R) at the NASDAQ Market Site in New York, November 14, 2014.
Mike Segar—Reuters

Keep unit revenues high and unit costs low—even if that means no flat-bed seats.

Virgin America VIRGIN AMERICA INC VA -3.6506% made its public trading debut last Friday. Its first few days as a public company have been incredibly successful — at least from the perspective of early investors. The Virgin America IPO priced at $23 (above the midpoint of the projected $21-$24 range). In its first three days of trading, the stock soared more than 60% to close at $37.05 on Tuesday.

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On the day of Virgin America’s IPO, I spoke with CEO David Cush and CFO Peter Hunt about the company’s strategy for growth and margin expansion. Here’s how Virgin America plans to take the U.S. airline industry by storm.

High unit revenue and low costs

To hear Cush talk about it, Virgin America’s formula for long-term success is extremely simple: keep unit revenues high and unit costs low.

Well, I think the key thing is understanding our model. Our model is we do have a premium product, we do generate a revenue premium to most of the industry, but we do it with a low-cost model.

So we have a very pure low-cost model. We are single fleet type; we are point-to-point. That was really the original playbook for the low-cost model. So: high revenue, low cost, and I think we’re seeing it on the bottom line now that the network has matured.

–Virgin America CEO David Cush

Of course, having high revenues and low costs is what every CEO wants. Virgin America is making progress toward this goal. In the 2 years leading up to Virgin America’s IPO, the company dramatically boosted its profitability.

Through the first 9 months of 2014, the company reported operating income of $86.3 million, representing an operating margin of 7.7%. By contrast, in the first 9 months of 2012, Virgin America posted an operating loss of $36.8 million for a -3.7% operating margin.

That said, among the top 10 U.S. airlines, Virgin America had the second lowest operating margin (excluding special items) for the 12-month period ending in September. Virgin America has solid margin growth momentum, but it still has plenty of work to do.

Plans to earn a revenue premium

Let’s take a look at the revenue side first. Virgin America plans to boost its unit revenue by continuing to offer a superior on-board product, including leather seats, a first-class section on every flight, Wi-Fi on every plane, mood lighting, etc.

In addition, Virgin America will focus its growth on high traffic routes in its top markets. “We’re not a big connect-the-dot carrier,” says Cush. “We like to focus on where we’re strong.” This really means San Francisco and Los Angeles: more than 95% of its capacity touches one of these two cities.

In other words, the seasonal routes from New York to Fort Lauderdale and from Boston to Las Vegas that Virgin America announced last month will be the exception, not the rule.

Virgin America has strong roots in San Francisco and Los Angeles. Moreover, these are two of the top business markets in the U.S. Both factors make it easier to attract corporate travel accounts there. On average, corporate travelers pay 50% more than other customers for Virgin America tickets. Thus, the carrier has a strong incentive to expand in those two cities.

The one promising market that Virgin America sees aside from San Francisco and Los Angeles is Dallas. Earlier this year, Virgin America snagged two gates at Love Field, a small airport that is much closer to downtown Dallas than the significantly larger Dallas-Fort Worth International Airport.

Love Field is a unique expansion opportunity. Nearly all of its gates are controlled by Southwest Airlines, a carrier that doesn’t offer many of Virgin America’s amenities (like first-class seats and personal TVs). As a result, Virgin America thinks it can attract corporate travelers who want those amenities but also value Love Field’s convenience.

Virgin America began flying from Love Field a month before the IPO. According to Cush, financial results for its flights to San Francisco and Los Angeles (which had previously used DFW) have been better at Love Field from day one.

Virgin America’s has also seen plenty of demand in its new markets from Dallas: New York City and Washington, D.C. This should lead to excellent financial results once these routes have a few years to mature, due to the capacity-constrained nature of all 3 airports.

Cost containment plans

Virgin America also has to keep its costs in line to produce outsize profits. Like most young carriers, Virgin America currently benefits from comparatively low labor costs. Its young fleet is also easy to maintain. However, as the company’s workforce and fleet age, both will be sources of cost pressure. (Unionization of its workers is another potential cost driver.)

Another challenge Virgin America faces is its refusal to mimic competitors by cramming rows closer together to fit more passengers on each plane. How can Virgin America mitigate or offset these cost headwinds?

One thing that both CEO David Cush and CFO Peter Hunt emphasized in our conversation was Virgin America’s “simple production model.” By maintaining a single fleet type and outsourcing more tasks than other airlines, Virgin America avoids complexity and keeps costs down.

Virgin America’s IPO will improve the company’s access to capital, according to CFO Peter Hunt. This will allow it to reduce its aircraft financing costs. For example, rather than leasing planes, it could take advantage of the low interest rate environment to issue cheap debt and buy the planes outright.

Virgin America also keeps costs down by not using flat-bed seats in first class on the lucrative transcontinental routes from JFK Airport in New York City to San Francisco and Los Angeles, where it deploys a lot of its capacity. This puts it at odds with the other 4 carriers serving those routes.

Flat-bed seats are an “overrated feature unless you’re on a red-eye,” David Cush recently told Bloomberg. Most transcontinental flights are not red-eyes. Virgin America doesn’t operate any red-eye flights going westbound, and it operates one daily red-eye on each of the San Francisco-JFK and Los Angeles-JFK routes.

Flat-bed seats take up lots of space, increasing unit costs. Most of Virgin America’s planes are A320s configured with 146 or 149 seats. By contrast, American Airlines recently began flying the A321 on its transcontinental routes. The A321 is a bigger airplane, yet American Airlines has configured these planes with just 102 seats (of which 30 are flat-bed seats).

Thus, for transcontinental flights, Virgin America operates with a denser configuration than its competitors (which is the reverse of the situation on most of its routes). If Cush is right and very few people care about having a flat-bed seat for their transcontinental flights, Virgin America will be able to generate plenty of revenue on those flights while having the lowest unit costs.

Time to get to work

Virgin America has plenty of work to do if it is to earn a revenue premium to the U.S. airline industry while maintaining low unit costs. In some areas, it has clear plans. Its recent buildup at Dallas Love Field should boost unit revenue. Virgin America’s IPO should reduce aircraft financing costs.

However, there are some big open questions. Is Virgin America right that flat-bed first-class seats aren’t necessary on transcontinental flights? Can Virgin America avoid the cost creep that has hurt various other low-cost carriers as they have aged? Only time will tell.

(Read the full interview with Virgin America CEO David Cush at The Motley Fool.)

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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TIME Companies

Grading Twitter’s Performance One Year After Its IPO

US-INTERNET-TWITTER
A banner with the logo of Twitter is set on the front of the New York Stock Exchange on November 7, 2013 in New York. Emmanuel Dunand—AFP/Getty Images

Twitter is generating big revenue and making smart acquisitions but slow user growth remains the dominant concern

Social networking giant Twitter was flying high a year ago, when its wildly successful IPO filled the company’s coffers and seemed poised to usher in a new wave of consumer tech public offerings.

But the company’s performance in 2014 has been mixed. New users are still coming to the site, but at a relatively slow rate. Revenue is growing briskly, but so are losses. And a revolving door in the executive suite means that the company’s leadership is in flux. As the Wall Street Journal points out in a profile of CEO Dick Costolo, exactly what Twitter is and what it wants to be seems to be ever shifting.

Here’s a recap of Twitter’s first year as a public company, grading its hits and misses.

User Growth

Over the last four quarters, Twitter has added 52 million monthly active users, growing its userbase by about 22%. In the year prior, Twitter added 65 million new users and grew its base by about 39%. This decelerating growth has been the main narrative dogging Twitter during 2014 and drawn unwanted comparisons to Facebook, which is still growing at a healthy clip despite dwarfing Twitter in size. Costolo has tried to divert attention toward other Twitter growth metrics, like the number of people who see tweets embedded across the Web, but investors continue to be fixated on user numbers. On this front, Twitter looks like a maturing company, not a quickly growing one, which is a huge problem given its stated ambition of “building the largest daily audience in the world.”

Grade: C

Stock Performance

Twitter roared out of the gate as a public company, jumping more than 70 percent from its IPO price of $26 per share during the first day of trading. Since then it’s been a rocky ride—the stock climbed above $70 amid a larger market rally at the end of 2013, then dove as low as $30 during the spring. Because investors (and perhaps the company itself) have yet to settle on exactly which metrics should be used to measure success, every quarterly earnings report from the company feels like a gamble. On Thursday, Twitter closed at $40.84. That’s well above the IPO price but perhaps not at the heights early investors dreamt were possible.

Grade: B

New Features

Everyone from tech pundits to Costolo himself have acknowledged that Twitter’s main failing is that it can be hard for new users to understand. The company’s made some cosmetic efforts to address this issue, by helping new users find interesting people to follow and revamping profile pages to make them more visually engaging. However, the core functionality of Twitter as an unending torrent of short messages filled with cryptic, site-specific shorthand remains unchanged. Twitter could make more changes to its core product to make it palatable to a wider audience—by presenting tweets based on an algorithm instead of chronological order, for instance—but such a move risks alienating the power users that provide so much of Twitter’s content.

Grade: C

Financial Performance

Twitter was famously unprofitable when it went public. The company now generates a small profit excluding some line items like stock-based compensation. But investors didn’t expect the company to make money in 2014 and its adjusted earnings have consistently exceeded Wall Street’s expectations. Revenue is also increasing at brisk pace, more than doubling to $361 million in the most recent quarter. The company also managed to increase the average revenue generated per 1,000 timeline views in each successive quarter this year. All in all, Twitter’s doing a good job monetizing its current userbase. The problem is that it hasn’t reached a level of scale that would allow it reach the revenue or profit levels of the biggest Internet companies.

Grade: B

Leadership

From its inception, Twitter has had a tumultuous executive suite, but the hirings and firings have come at a torrid pace since the company went public. In the last year Twitter dumped its chief operating officer, its chief financial officer, its product chief, its vice president of media and its head of news. This ongoing shakeup has not yet led to a significant boost in user growth or a meaningful rethinking of the Twitter product. Instead it’s created confusion about the company’s direction.

Grade: D

Events

Twitter has always shined most during big events, and the company worked hard this year to make the site an even more essential event destination. The biggest push came for the World Cup, when Twitter made a landing page full of curated tweets and live scores. Other big events included the Super Bowl (most tweeted ever), the Grammys and made-for-social TV programming like the ridiculous Sharknado movie. There was also Ellen Degeneres’ celebrity-studded Oscar selfie, which was retweeted more than 3.3 million times and generated gobs of free press for Twitter. The social network has effectively made its users’ conversations a relevant facet of virtually every heavily covered news event, whether it’s the Ebola outbreak or #AlexFromTarget.

Grade: A

Acquisitions

All of Twitter’s big-time acquisitions still appear to be chocked full of potential. MoPub provides the basis for Twitter’s ad exchange and is front and center in the company’s new suite of developer tools to help app makers place ads in their programs. Twitter data licenser Gnip will help the company better monetize its firehose of tweets, which are a sought-after gauge of public sentiment for marketers and academics. And microvideo website Vine, which seemed like a curious oddity when first acquired in 2012, now racks up more than 1 billion video plays per day. Even if the growth of Twitter proper remains slow, the company can tap into other revenue sources.

Grade: B

 

TIME technology

Alibaba Founder Jack Ma’s Other Big Job

Alibaba Chairman Jack Ma
Jack Ma, chairman of Alibaba Group Holding Ltd., in Hong Kong on Sept. 15, 2014. Brent Lewin — Bloomberg / Getty Images

The Alibaba IPO will set a record, but the company's founder has focused on China's environmental problems

Friday’s Alibaba initial public offering will officially be the largest in U.S. history: the Chinese e-commerce giant is raising $21.8 billion with its stock debut.

But Alibaba’s billionaire co-founder Jack Ma — though a major presence on the IPO circuit and a major beneficiary of it, standing to gain hundreds of millions of dollars from the stock — isn’t just focusing on his company and its earnings. In fact, last May he stepped down from his position as CEO. (He’s still the company’s chairman.) He is, as Victor Luckerson spelled out earlier this year, not your typical tech honcho. Rather, he’s a former English teacher who doesn’t code and loves the soundtrack to The Lion King.

He’s also one of China’s most important environmentalists, as Bryan Walsh explained in a 2013 TIME profile of Ma:

But as entrepreneurs get older–Ma, 48, says he is “old for the Internet”–they start to slow down, look around. What Ma saw was a country paying an environmental price for rapid development. His father-in-law developed liver cancer, a disease Ma–and some scientists–connects to the terrible water pollution that is now common in much of China. Ma saw the skies in Beijing and other Chinese cities grow foul with pollution. On a trip to the countryside near his hometown of Hangzhou, he saw that a lake in which he had nearly drowned while swimming at age 13 now barely came up to his ankles. Farmers told him that they were so afraid of the poisoned soil, they wouldn’t eat some of their own produce. “I knew something was very wrong,” Ma told TIME during a recent interview in Santa Monica, Calif. “This is serious–and we have to make people pay attention to it.”

Now Ma is making it his mission to get China to pay attention to its environmental mess. On May 10, he stepped down as CEO of Alibaba, though he’ll retain a strategic role with the company. The next day he took a new job, as chairman of the China board for the Nature Conservancy (TNC), one of the richest environmental groups in the world. TNC has generally been U.S.-focused, but the sheer size and influence of China ensure that global environmental and climate issues will increasingly be decided there. If China is going to change for the greener, it will need local champions. Ma has volunteered.

Read Bryan Walsh’s full 2013 profile of Jack Ma here: From Gold to Green

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