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Apple or Google: The Race to $600 per Share

I know.  I know.  I know.  Apple reaching $600 before Google sounds absurd. Google which closed at $532.25 / share on Friday only needs to appreciate 12.7% to hit $600, while Apple at 360.25 /share would need to increase 66.5%.  As crazy as it sounds, if Apple outperforms Google at the same rate as last year it is doable.   In 2010, Apple outperformed Google by 57.3%.  Duplicating that performance, starting now, gets Apple there first.  So, based on past performance it’s possible.  However, that’s not why I am writing this article.  Two reports released Friday morning – got me thinking about this.

First, Morgan Stanley downgraded Google from $645 to $600.  The report was brutal.

  • Debate #1: Will margins decline from here? Yes.
  • Debate #2: Will “newer” businesses drive near-term revenue outperformance? No.
  • Debate #3: Will investments in local eCommerce and / or social pay-off? Too early to tell.

As a Result, We Are Reducing Our Estimates:

We are reducing our profitability estimates (now significantly lower than consensus) due to the following: 1) Google’s aggressive hiring plans, 2) rising salaries due to a competitive hiring environment, and 3) increased advertising spend to drive usage of new / existing products.

In 2011, Morgan Stanley expects search & contextual ads to contribute ~90% of Google’s net revenue.  Thus all other businesses such as DoubleClick, YouTube, AdMob, Android Market, and mobile search will only contribute 10% of revenue.  It is simply not a good business practice for a company to be so reliant on one revenue source. Interestingly this is by design and may become their achilles heel.

Google is an advertising company “fronting” as technology company. Its reason for existence is to get as much advertising in front of as many people as possible. This changes the traditional technology game from providing the “best product at the best price possible” to providing the “cheapest ‘good enough’ product possible.”

No one that has used Excel extensively will tell you that Google Docs is better.  However, 90% of the time Google Docs is good enough – especially since it’s free.  That simply kills the price that Microsoft can charge for Excel.  Most people will say – who cares it’s time for Microsoft to get its comeuppance. Yea, but what about the start up that had a more innovative spreadsheet program that couldn’t compete with free?

Google employs this strategy down its entire product line – that’s why the other products only bring in 10% of its revenue.  However, they can only play this game as long as the cash cow (desktop search advertising) is providing milk.  As the market trends away from desktop computing to mobile, the Street is becoming less convinced that Google can commoditize the mobile market and stuff it with ads before the cash cow runs dry. At least that’s part of the reason for the Morgan Stanley downgrade.

The second report that I read was speculation that Apple had just inked an iPhone deal with China Mobile. China Mobile is the world’s largest wireless carrier with over 611M subscribers.  Brian White, Ticonderoga Securities’ chief Apple analyst, has a boilerplate sentence stored on his computer that goes like this:

We believe the ramp of the mobile Internet in China will be one of the great wonders of the tech world over the next decade and the country has clearly caught “Apple fever” that we believe will only accelerate as the company expands it carrier base to include both China Mobile and China Telecom.

If the deal is struck, Ticonderoga Securities thinks Apple’s stock could skyrocket north of $600.

There you have it. Two different Wall Street analysts with $600 targets on both companies. As well as, the math based on last year’s performance showing that it’s possible for Apple to get there first.  Of course, you still don’t believe it – but that’s what makes a market.

 

Disclosure:  Long Apple and Short Google.  Positions may changed at any time.

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Does Motorola Benefit from Google Blundering the Nortel Patents?

When Eric Schmidt stepped down as CEO of Google he said that adult supervision was no longer needed. Its founders Larry Page and Sergey Brin where well prepared to run the show.  Based on this past week’s bidding for Nortel’s patent portfolio, the jury may still be out on that pronouncement.

CNN Money sums it up quite well.

Perhaps if it had been Google (GOOG) that was getting hauled into court for patent violations it would have fought harder to win this week’s auction for the rich portfolio of intellectual property bequeathed by the bankrupt Nortel Corp.

But it was Google’s Android partners — the HTCs, Motorolas and Samsungs of the world — that were getting sued for making smartphones that look and feel suspiciously like the iPhone.
And when bidding for the patents that would have bought Android some legal protection got serious, Google started playing games.

Quoting “three people with direct knowledge of the situation,” Reuters reported late Friday that Google was making bids that were literally irrational — using numbers like Brun’s constant (1.902160540…), the Meissel-Mertens constant (0.2614972128…) and, when they got permission to go past the $3 billion limit, pi (3.14159…).

The consortium of Apple, Microsoft, RIM, Sony Ericsson and EMC didn’t impress their dissertation professors with fancy numbers, but won the bid.  You have to wonder what Google was thinking considering the legal state of Android:

These problems don’t go away with winning the Nortel auction, but at least it increases their bargaining power.

On yesterday, InterDigital, owner of a broad spectrum of wireless patents, was up 14.7% – no doubt related to the size of the Nortel deal.  Motorola was also up 6.5%; without any other news one must surmise that the gain was partially related to the patent deal as well.

I received an interesting tweet saying that Google and Motorola may partner closer due to Motorola’s patent portfolio.  I am not sure how much a closer partnership would help, but an outright acquisition may make sense.  Motorola has a market cap of $6.9B. Tack on a 20-30% premium and that’s a little more than Microsoft paid for Skype.  Google gains some patents that can help it and its partners in these disputes. Plus it gains hardware expertise that can only benefit its Android strategy.  Makes sense to me, but probably won’t happen.  They could even make the premium a prime number to make their professors happy.

Disclosure: Long Apple. Short Google.

My short on Google will most likely be closed soon. Over the last 8 trading days, three of the market timing systems that I follow have moved from market sell to buy. This could be one of those rising tide lifts all boat scenarios.  Also, Google+ seems to be getting favorable reviews. I believe Google is a long term short (see RIM is Done, Who’s Next), but my pockets aren’t deep enough to stay short as the trade moves significantly against me.  I will re-short in a more favorable environment – which could be after earnings in a few weeks.

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The StockTwits Edge – Destination Best Sellers List

Since it always seems as though time is a premium, I very rarely read Financial books from beginning to end.  I jump around based on interest.  As I began planning my attack for “The StockTwits Edge,” I browsed the table of contents.  Chapter 1 is “Find Trends, Ride Them and Get Off” by Howard Lindzon. According to Howard, it’s the best chapter in the book – so that may be a good place to start.  However, Chapter 2 sounds interesting – “Trade, Trend, Tail” by Keith McCullough.  Keith is a smart dude.  I see him on TV a lot.  Next up is “Don’t Quit” by Michael K. Dawson, @TrendRida.  No need to go any farther; I will start there.

Last August I had lunch with Phil Pearlman and Justin Paterno, of StockTwits,  while they were in Boston for meetings.  Interestingly, 5 years ago our paths would NEVER have crossed.  I was a high tech salesman – selling software to the likes of IBM and Intel, while Phil was behavioral strategies wizard  at a hedge fund.  StockTwits, a social media site for traders and investors, brought us together.  At the end of our lunch, Phil asked me to write a chapter for their upcoming book.  Without hesitation, I said yes.

As I discuss in my chapter, I began trading in the mid-90s.   While the market marched straight up, it appeared as though I was a genius. However, in March of 2000 I learned the meaning of the phrase “do not confuse a bull market with genius.” Over the next nine months my genius label disappeared, as I watched my account go up in smoke.

At the time, I had never even met anyone that worked on Wall Street.  Most of us outside the financial meccas of New York and Chicago learned everything we knew about trading from books.  Unfortunately, most of those books focused on buying – while very few discussed selling and even fewer shared money management strategies. Although, I haven’t read all of the chapters in The StockTwits Edge yet – I can guarantee you that you will be bombarded with selling and risk management strategies. I believe that we all collectively agree that there is nothing more important.

In the book, you will learn that there are many different ways to skin a cat.  There are numerous successful strategies and approaches to the market.  I describe my strategy that works for me and it may not work for you.  However, I hope that I have shared a message that transcends trading styles. I conclude with a quote from Donald Trump.  I realized that there would be some baggage attached to Trump’s name and his Presidential attempt has added even more.  Regardless of what you think of him this quote sums up my philosophy in the markets and in life – “Never ever give up.  Never quit.  You can never be successful if you give up.”

Trading is an easy game to get into, but it is a very hard one to succeed in.  It seems as though losing a large sum of money at some point – is almost a rites of passage in this business.  Trust me after losing more money in 2000 than I believed that I would ever have – my confidence was shaken.  It would take almost 2 years to start trading seriously again. Many never tried again.  However, it was my persistence combined with a understanding of risk management that allowed me to quit my high paying corporate job and reap the rewards that trading provides – freedom, independence and the Green.

The StockTwits Edge is an absolute must read!

 

PS,

The StockTwits Edge may be destined for the best sellers list, but StockTwits, the community, is destined for far greater accolades.  The ability to communicate and share ideas, in real-time,  with so many market experts has never existed before.  This significantly shortens the path to success.  That’s extremely valuable and will be realized in time.

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RIMM is Done – Who’s Next?

Friday was a terrible day for Research in Motion’s (RIMM) shareholders and employees. The stock’s 21% pummeling was the culmination of a series of bad management decisions that date back to first time the word iPhone was uttered in January of 2007. RIMM’s management snickered at the announcement. After all, RIMM was king of the mobile hill. It had a legion of fanatical customers. Its market share was growing like weeds. All was good.

Four years later, management still believes it’s 6 months away from a viable response. In the mean time, I carved out a few bucks on the short side. Not nearly as much as I should have, but I am ready to move on to the next casualty in the smartphone wars.

Here are a series of tweets that I tweeted after the RIMM conference call:

I received several responses back, but none were ready to accept my thesis. Matter of fact, my thesis sounds bizarre. Android is an state of the art OS. Its users are fanatical about it and it’s growing like weeds. Sounds familiar. All is true, but Google’s secret sauce is under attack. Android manufacturers love it, because it’s a much better OS than they could design and the price is right – $0. Google gives Android away hoping to make money from ads.

Well – free is not free anymore. HTC pays Microsoft a $5 fee for every Adroid device it sells as part of a patent settlement between the two companies. Microsoft has also filed a lawsuit against Motorola claiming their devices infringe on nine patents. Microsoft is also pursuing patent deals with other Android manufacturers including Acer and ASUS.

Oracle is also getting into the mix. A filing from Google hinted that Oracle wants more in damages than Android has earned in its entire existence.  Hot off the press today – an Oracle expert claims that Google may owe up to $6 billion.   If Microsoft delivers on its upcoming Windows Phone 8 OS – these lawsuits may push many Android OEMs into Steve Ballmer’s arms.

If Larry Ellison and Steve Ballmer don’t inflict enough pain – Google is doing a pretty good job itself. Solar initiatives and driverless cars will all prove to be superfluous expenses. Worse yet it’s entire mobile revenue/expense structure is upside down. Although Android is growing like wildfire, Google’s share of profits is not growing proportionally. It has effectively become the software R&D department for Android manufacturers in exchange for a hope that an end user will click on an ad.

Google’s Wallet mobile payment service continues its “hope for a click model.” IMO, the amount of money that it has/will spend is not commensurate with its return. Its desktop search advertising cash cow has allowed Google to maintain its current business model. However, desktop search is under attack as different discovery models emerge.

Every analyst and their grandmother downgraded RIMM on Friday. That horse is out of the barn. Where were they 6 months ago? Check my archives.  I felt like a lone wolf 1.5 years ago.  Google is still in the barn grazing. I don’t expect it to shed $500 in the next few days. This is a long term play for me.

Disclosure: Short Google. Position subject to change at any time.

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The Market Wanted iPhone 5 and It Got iCloud

The stock market yawned at Apple’s iCloud announcement last week.  On the week, the stock was down -5.1% vs. -2.2% for the market.  In hindsight, I believe that Apple would have sold off regardless of the news. The market has been in a funk in respect to the company all year.  Concerns over Steve Jobs health haven’t helped, but in my opinion the market simply doesn’t believe that Apple can continue to innovate and grow at its current pace. To do so would be to defy history.

I love Horace-Dediu’s response to Why are Investors unhappy with iCloud? BTW, Horace is a brilliant deep thinker in mobile computing. His blog is a must read.

Sell side analysts are generalists and are assigned multiple companies in certain sectors or even multiple sectors to cover. They apply similar, generic methods to analyze anything from food service to oil and gas and to semiconductors.

Analysts who cover Apple usually have experience in the computer industry. Computer hardware is not particularly useful in understanding the mobile phone business and nobody has any experience understanding cloud-based business models since they don’t currently exist. As a result it’s easy to dismiss something for which data does not exist.

But as others have noted, the behavior of the market is de-coupled from reasoned analysis anyway. Apple suffered massive share price collapses due to brilliant strategic moves (like going to the Intel chip for the Mac or launching the Air product.)

iCloud changes the dialog.  The market doesn’t understand it.  The market doesn’t understand how Apple will make money off of it.  It’s the unknown.  However, that’s the golden nugget for investors. Any amateur analyst with a spreadsheet can guessimate how many iPhones Apple will sell next quarter, but money is made when assets are mis-priced due to uncertainty.

iPhone 5 is coming soon.  It will have a faster processor. A better camera and maybe even the hot technology of the day – Near Field Communications (NFC).  That being said, there are 20+ different OEMs cranking out Android phones in many different configurations every month.  Just 2 years ago Motorola looked like the come back kid in mobile.  Now its an after thought in Andriod phones.  Apple can not win the feature game and it’s not what their customers want. An electronic wallet powered by NFC sounds cool, but if only 1% your merchants support it – why rush it out the door.  The majority of Apple customers simply want stuff that JUST WORKS.

Henry Ford was wise enough not to simply give us a faster horse and Apple won’t fall into that trap either.  To defy history – you can’t do what people expect.  The market wanted an iPhone 5 and it got iCloud.

Disclosure: Long Apple.