Dr. Lee responds to Citron’s Letter of Aug 31
In Mr. Andrew Left’s “point-by-point” response dated August 31, 2012, he completely evaded Dr. Lee’s original seven criticisms, and chose to just mince words. Dr. Lee’s new response below restated the seven clear criticisms, and also pointed out the following new observations from Mr. Left’s letter dated August 31:
- Mr. Left’s unwillingness to engage on the direct accusation that he totally misunderstood Sogou’s product line should be taken as an admission of ignorance
- Mr. Left’s understanding of a company he recommends is at the level of an analyst who says : “Buy Microsoft because the Xbox+Office product will beat PlayStation”.
- Mr. Left made a new statement about market share that is off by a factor of 2-3X!
- Mr. Left admits that he used what he considered fraudulent data in his recommendation, without revealing the “fraud” to new readers.
- Mr. Left comically restates “a valuation of $697M” as “just an opinion that $200M is too low”.
- During a period where company’s market share went from 0% to 10%, while another stayed flat at 4.5%, Mr. Left concludes the two companies’ valuations should increase by exactly the same amount.
On August 31, 2012, Citron’s Andrew Left issued a response to my two letters and seven points. Below are my point-by-point rebuttal to him:
1. Citron lacked basic understanding of Chinese search market.
2. Citron misunderstood Sogou products and combined two products into one.
a. My main point in these two sections was that Mr. Left didn’t even possess a rudimentary understanding of Sogou’s products and their competitiveness. His lack of understanding was comically demonstrated in his fabrication of a new product by combining two basically unrelated products! I will take his silence on this point as his acknowledgement of his inept understanding of all the products offered by the company that he is recommending. (Imagine an analyst recommending Microsoft because “Xbox will defeat PlayStation because Microsoft Office is integrated with every Xbox game”!!!)
b. Regarding the NEW points he brings up:
i. Mr. Left now claims Sogou is about 10% the size of Baidu. Does he mean revenue or search share? Let’s try both: Baidu’s 2012 Q2 revenue was $859M, and Sogou’s was $30M. Baidu’s Q2 search share was 86.32% and Sogou’s was 4.54%. So Sogou is 3.5% or 5.3% of Baidu, not 10%. It is appalling that Mr. Left as an analyst could be off on his market share numbers by a factor of 2-3!
ii. Mr. Left states that Qihoo “might gain a 10% foothold in search in China, after several years”. The fact is that Qihoo has 10% now.
iii. Mr. Lefts states that Qihoo’s search compared to a fully monetized search is comparing “apples” to “oranges”. He is completely wrong, and didn’t get the basic points I made about using Google AdWords. Google AdWords can be added to the existing Qihoo search in about one quarter, and it would produce $98M of revenue per year. This has been done by AOL, ask.com, and Tencent’s Soso. This is about converting oranges to orange juice (with a proven juice machine), not apples!
3. Citron compared apples to oranges in its web traffic analysis, and did so unfairly.
a. Again, Mr. Left ignores my points that: 1) comparing web traffic is not a meaningful way to compare two companies’ market value (Yahoo has three times the traffic of Amazon, but only one-seventh the value), 2) it is not meaningful to compare web traffic of two companies in different businesses (MSN had more traffic than Google for a long time, but are not comparable), and 3) Citron distorted the data to get the result it wanted.
b. Mr. Left states that “portals and navigation sites were both gateways” thus they’re in the same category.” In China, Navigation sites’ purpose is to send the users to another site (possessing much value as it serves as a recommendation engine that could be monetized); portal sites’ purpose is to keep users there (costing a great deal to build all the content). I would prefer to own a “navigation site” that has one-half the traffic of a “portal site”. It monetizes better, and costs less to run. These are simple points missed by Mr. Left, who appears to want to use Alexa to determine stock price.
4. Citron omitted critical data in its financial comparisons of Sohu and Qihoo.
a. Mr. Left states that “The “financial comparisons” between Sohu and Qihoo are for every investor to draw their own conclusions”. But he left out revenue and earnings growth! How can an investor draw conclusions without the most critical data? If Mr. Left wants to compare the financial performance, then he must follow industry practice and provide revenue and earnings growth. His approach of doing financial analysis omitting the most critical information (in order to reach his wrong conclusion) is outrageous!
b. Mr. Left states that it is OK to leave out the revenue and earnings growth figures in assessing Qihoo because the company revenue numbers are fraudulent. In that case, Mr. Left’s usage of the revenue information directly is even more fraudulent. Why did Mr. Left use what he considers to be fraudulent data in his analysis? (and not pointing it out to the first-time readers!)
5. Citron did not understand search monetization and zeroed $98M of revenue.
a. There are three points: (A) When Qihoo used Google search and ads, analyst predicted $100M revenue in 2013, (B) When Qihoo used its own search, and no ads, it would receive $0, (C) If Qihoo used its own search but Google’s ads as I suggested, it would get back the $98M in 2013.
b. Both of Mr. Left’s defensive points are just mincing words: (1) Qihoo’s management stating zero search revenue was about (B) only. (2) Mr. Left’s acknowledgement of analyst $100M estimates are about (A) only. They do NOT answer my criticism of his report.
c. My criticism was simply that: Mr. Left’s original paper mentioned (A) and (B) but not (C). In other words, Mr. Left assumed it would take years for Qihoo to build the monetizing infrastructure, thus negatively affecting revenue. Mr. Left did not understand that Qihoo did not need to build an ad infrastructure, and can just use Google AdWords. No amount of word-mincing will trick people to think Citron understood this basic point.
6. Citron’s video analysis was ludicrous, and missed obvious business issues.
a. My criticism was on Mr. Left’s statement: “we’ve assumed a valuation of SOHU’s video matching Tudou ($679M).” This was outrageous, and I gave four business reasons to discredit his analogy. In Mr. Left’s “rebuttal”, he now restates his position to be “JP Morgan’s $200M is too low”. I will accept his restatement ($679M down to “more than $200M”) as admission that he was originally guilty of “undisciplined and wild copy-pasting of numbers.”
7. Citron’s adding market cap from one company to the next was wild and ridiculous.
a. My original point was very simple: Citron took Qihoo’s market cap gains in four days and simply adding it to Sogou’s market cap, during a period when Qihoo’s market share went from 0% to 10%, while Sogou’s went from 4.5% to 4.5%. This is shocking. Mr. Left’s reply was that this was somehow related to JP Morgan’s analysis (???). His evasiveness is not surprising, as there can be no way to justify that kind of wild analysis.
It is interesting that Mr. Left’s “rebuttal” didn’t answer any of the issues I brought up in my original paper. This is understandable because his report had fundamental flaws and errors. It is ironic that Mr. Left has said in the past: “I only tell the truth. We run everything by a team and if we are unsure of it, we don’t publish it”. It certainly seems that his definition of “truth” is not from this planet.
REFERENCE | Citron Research: Reply Points to Kai-Fu Lee August 31 [PDF]
(This article was originally posted on Zhihu.com)