Author: Michael D

Digital Equipment Corp and Wang Labs were both highly successful companies in the era of microcomputers.  However, both completely missed the transition to PCs.  Maybe in internet time that was centuries ago, but in real time it was only 30 years ago.  What has taken Wall Street so long to figure out that Research in Motion is the today’s Wang?

The following statement in Morgan Stanley Internet Report from January 2010 kind of beats around the bush, but doesn’t make any proclamations:  New companies often win big in new cycles while incumbents often falter.

In my opinion, Nokia, Palm, Microsoft and RIMM have all faltered in the transition to mobile computing.

My disappointment with RIMM goes back to 2009 when it became apparent that the company couldn’t deliver the phone that I wanted.  In 2007, my golf partner showed me all of the cool stuff that he could do with his iPhone.  I waited for RIMM’s response.  The Storm came out the following year.  The Verizon sales rep begged me not to buy the phone – not wanting me to be added to growing list of disappointed owners.  The Storm II released in 2009 wasn’t be much better.

At that point, my love affair with RIMM as a company was over.  I had patiently given them two years to develop a credible alternative and they failed.  My love affair with the stock would end shortly after that when I was caught on the wrong side of an earnings disappointment.

After four years of floundering, Wall Street has finally run out of patience.  A barrage of downgrades were issued after RIMM’s latest earnings announcement (RIM Off 11%: Four Downgrades On ‘Transitionary’ Quarter).  In spite of all of this there are individual investors still adamantly defending their position in the stock. On Saturday, the discussion was spirited on StockTwits.  I added my two cents with the the following:

I have learned over the years not to knock anyone’s investment strategy.  There are a million ways to skin a cat in this business.  However, I can only imagine that those continuing to support RIMM are part-time investors with additional sources of income.  In my world, it is poor money management to have my money tied-up in a stock like RIMM.  Last year the stock had a negative 14% return.  Not only was the 14% lost, but the opportunity to invest those dollars in a leading stock was lost as well.

Disclosure:  Long Apple.

I started buying Qualcomm’s stock in September for this very reason:

the 3G radio (iPad2) represents yet another big win for Qualcomm. The 3G chip is the same one used in Motorola’s Xoom tablet, and in the Verizon version of Apple’s iPhone. That’s pretty big props (not to mention volume). Information Week

It is a no-brainer that Qualcomm will be the 3G radio supplier for the iPhone 5 and most likely the iPhone 6 & 7 as well.  In other words, Qualcomm’s revenue is getting ready to spike and the stock price is coming along for the ride.

I scream at my computer screen a lot.  It’s something that I’m working on.  However, when I saw the following – I couldn’t scream; I couldn’t yell;  I was flummoxed.

10-Mar-11 08:08 ET

ARM Holdings drops 5% in overnight trading; hearing weakness attributed to comments out of JP Morgan saying the co is most at risk from poor non-iPad tablet sales (27.56)

ARM dominates the market in Application Processor sales to the smarthphone industry and is well positioned to do the same in tablets.  So in theory, if the “gang that can’t shoot straight” (Research in Motion, Motorola, HP, Nokia, etc.) can’t get their act together in tablets – ARM will sell fewer processors to them in 2011.  That makes sense, but will ARM will sell fewer processors overall?  The market believed so and ripped 10% from ARM’s hide on Thursday.  Considering that the only tablet maker that can shoot straight (Apple)  is a customer – this rush to judgement may have been a little too soon.

Examining the call a little closer it appears that JP Morgan can’t shoot to straight either. Mark Moskowitz of JP Morgan had the following to say in January 2010 after the iPad was unveiled.

In our view, the iPad is a smart, nimble device for heavy content users – Apple’s core customer. iPad is a hybrid of sorts, marrying select benefits of the smartphone and notebook. We expect the market to be small at first, but the gamer and education verticals should construct a meaningful growth ramp longer term.

Apple went on to sell 9.5 million units in 2010.  Not exactly a small market.

That being said, I have an issue with taking market projections in such a nascent industry to seriously.  The Wall Street types have sophisticated models to make their projections, but here is how an MBA student would forecast the size of the tablet market in 2011.

The student would take the 9.5 million units Apple sold in  2010 and project it over 12 months.  Thus, Apple would have sold 12.5 million over an entire year.  Next, they would search the internet and find out that iPhone sales grew 245% between its first and second year.  Considering this is a new category they may dial back the growth rate to 200%.  So, their estimate for Apple 2011 iPad sales would be 37.5 million.  Assuming Apple has a market share of 80%, one would expect 47 million tablets to be sold in 2011.  The actual Wall Street consensus is 50 million. My point is that these estimates are nothing more than a SWAG (Scientific Wild Ass Guess).

In my opinion, if the 50 million unit number proves to be accurate and if the “gang that can’t shoot straight” can’t meet their allotment – Apple will fill the void.  Now I realize that there are people that hate Apple and won’t buy anything that Apple makes.  However, I refuse to believe that 20% of projected buyers of tablets in 2011 have that point of view.  If the “gang” doesn’t provide viable alternatives many of those projected to buy non-Apple tablets will simply buy an iPad.

In other words, I don’t believe the market will shrink because the “gang” can’t get its act together.  The smartphone market is a prefect example.  The “gang” has been struggling since the release of the iPhone, but the overall market has grown not contracted.

The bottom line is the 10% haircut ARM Holdings took after this lame-ass analyst report was a gift.  Buyers on Thursday’s close are already up 3.7%.  ARM is in the sweet spot.  They provide extremely high valued intellectual property that is not easily replaced with competing solutions.  For this reason they are part of my “8 Ballers of Mobile” portfolio.  I haven’t back tested the Lame-Ass Analyst Signal, but I am willing to bet that buying after one is more profitable than not.

Disclosure:  Long Apple and ARM Holdings.