Author: Michael D

Near Field Communications (NFC) has been the topic de jour in mobile for the past year.  According to the NFC forum – NFC makes life easier and more convenient for consumers around the world by making it simpler to make transactions, exchange digital content, and connect electronic devices with a touch.  NXP Semiconductor co-invented the technology in 2002 and is clearly the industry leader.  Nine months ago neither Broadcom or Qualcomm had a NFC solution – now both espouse their capabilities.  It is believed that this technology will be integrated in most mobile phones over the next few years.

Investors are chomping at the bit for NFC.   Take a glance at a 4 year stock chart of almost any semiconductor company providing IP to the mobile phone industry and you will understand why.  In December, when NXP announced a partnership with Google to provide NFC – the stock took off.  From the time of the announcement until NXP’s fourth quarter conference call on February 15, the stock price increased 57%.  During the conference call the NXP’s CEO tempered investor’s enthusiasm with conservative guidance and made it clear that NFC was a second half of the year story. Since then the stock is only up 6.7%.  The rumors of Apple delaying adoption of NFC until 2012 haven’t helped either.

Google’s announcement of Google Wallet on May 26 has thrown more cold water on the stock.  Since then, NXP is down 6.5%.  The market is also down 1.5%, but NXP is clearly under performing.  I believe that after the Google wallet announcement – investors began realizing that this may end up being a late 2012 story.  The reason being that as an alternative to a credit card – NFC is just too complicated. Merchants will need to upgrade their existing point of sales terminals with NFC enabled ones. NFC chips will need to be installed in phones. Credit card companies will need to process the payments.

Google has partnered with several companies to begin a trial this summer.  Citi MasterCard has signed on as a payment processor. I assume that means it will work with a Bank of America MasterCard, but if you use a Visa or American Express you are out of luck.  Apparently,  it also works with a Google pre-paid card.   Sprint’s Nexsus S is the only phone that will work.  So, Motorola, Samsung, HTC Android powered phones using Verizon or AT&T need not apply.  However, there is some kind of NFC enabled sticker than can be attached to non-Nexsus S phones.  Finally, the merchants have to accept the payments.  Partnering with Citi and its PayPass service is supposedly a good start, but you can see how complicated this is.

I am not sure how long this trial is going to run.  I am assuming 3 months, but it could easily run longer.  Additionally, Google is being sued by PayPal over claims that it stole trade secrets.  Finally, Google has to convince the public this method is better than simply whipping out a credit card.  Not to mention security concerns.  So you can see how broad adoption could be a ways away.

Another problem for NXP is that the longer adoption is delayed, the higher the probability of Broadcom or Qualcomm offering an integrated solution that is smaller, faster and lower powered.  These companies also provide more cost competition.  Along with being the new guys on the block, their designs may be much more flexible than NXP’s solution.  I wouldn’t be surprised if Apple engineers aren’t sitting down side by side with Broadcom or Qualcomm’s engineering fine tuning a solution specifically for Apple.

NXP co-inventor of the technology still has many advantages, but I believe the market is starting to understand that this won’t be a slam dunk for NXP.

 

Disclosure:  Long NXP Semiconductor and Apple.

Recall that the 8 Ballers of Mobile is a Long Term strategy designed to profit from technologies driving the next generation of computing – Mobile, Social and the Cloud.  Unfortunately, at times, all long term strategies are subject to some uncomfortable levels of volatility and this strategy has endured its fair share since the end of April.  That being said, the 8 Ballers are still keeping up with the market ( S&P 500 3.4% vs. 8 Ballers 3.3%).  Trust me – my goal isn’t to keep up with the market, but to significantly outperform it.  Needless to say, I have to do a better job protecting my gains during these downturns.

Below are portfolio changes since the last update.

SOCIAL:

SINA was “de-balled” to the tune of 11% on 2.5 times its average volume as rumors of fraud circulated on Friday.  Whether the rumor proves true or not – there is too much BS going on in China.  This past week, John Paulson, reportedly lost $500M in a Chinese stock fraud.  These scams are beginning to penalizing legitimate firms – like I believe SINA is.  Trading is hard enough without having to deal with this stuff.  Fortunately, I began accumulating SINA in the high 70s – so it goes out a winner.  As more US based social media companies become publicly tradable, I will consider adding them to the portfolio.

CLOUD:

Speaking of China, my initial attraction to Yahoo was specifically around their expertise in Hadoop – a technology that enables real-time analysis of huge amounts of data aka “Big Data.”   An article, Yahoo Mulls Spinoff for Hadoop Software Unit really peaked my interest. When Yahoo hit a 52 week high in April, I thought that their troubles were behind it.  Shortly after my investment, Yahoo was hit with a buzz saw.

There are tons of articles written on the sudden change in ownership of Alipay from the Alibaba Group, a Chinese company, of which Yahoo owns 43%.  Yahoo’s position was that they were blindsided by the deal.  Jack Ma, CEO of Alibaba, said that this had been discussed at the board of directors level for over 2 years.  Jerry Yang, Yahoo’s former CEO, sits on the board.

The initial shareholder outcry centered around Yahoo’s incompetence and based on previous history it was justified. However, Softbank has a member on the board as well and they haven’t come to the table to negotiable a settlement yet.  So did the Softbank’s board member sleep through these meetings also or is Jack Ma lying?

All I know is that they play by a different set of rules in China.  Based on all of the frauds and scams over the past few months, I’m staying away from Chinese stocks as investments.  As a trade, that’s a different story – but the 8 Ballers is designed as a long term strategy.

Based on my research, I believe that MicroStrategy, Qlik Tech and Informatica are the best pure plays in Big Data.   Thus, I have sold my original Big Data play Tibco Software and have added Qlik Tech and Informatica.  Positions in Aruba Networks and Riverbed Technologies were also sold since last update.

MOBILE:

The negative reports continue coming out fast and furiously on RIMM.  Unfortunately, I closed this short on Wednesday.  I will be looking to re-establish this position soon.

The cash raised by selling SINA significantly reduces with the portfolio’s volatility and with the dog days of summer coming that’s just what the doctor has ordered.

 

Year to date performance: 8 Ballers of Mobile 3.3% vs. S&P 500 3.4%

Disclosure: Long: Apple, NXP Semiconductor, Informatica, Micro Strategy, Qlik Tech, Yahoo.  Positions may be closed at any time.

The 8 Ballers of Mobile is a Long Term strategy designed to profit from technologies driving the next generation of computing – Mobile, Social and the Cloud. Based on analysis of previous computing eras, I have concluded that the next 4-5 years will be the optimal time to maximize profits from this trend. To capture the majority of this move some uncomfortable levels of market volatility must be endured. The past three weeks serves as an example – as significant year to date gains were given back. For the first time this year, the strategy is lagging the market 5.5% vs. 6.0%.

Several changes were made to the portfolio this past week.

CLOUD:

 

 

MicroStrategy joins Tibco and Yahoo as I attempt to leverage the concept of “Big Data” – the ability to create, manipulate and manage very large data sets.  See my blog Why MicroStrategy is a Baller for more info on this little stud.

 

Riverbed was caught in a sector sell off in March. The pain was halted when the company pre-announced earnings in April.

Riverbed Technology sees Q1 revs of $163-164 mln vs $160.1 mln Thomson Reuters consensus, sees Non-GAAP EPS of $0.19-0.20 vs $0.18 consensus (RVBD) 30.92 -2.15 : Co guides Q1 above expectations… Co said, “With a strong start to 2011, Riverbed exceeded revenue and earnings expectations in the first quarter. We executed well, achieving 45% year-over-year revenue growth, and non-GAAP operating profits doubled compared to the first quarter last year. Sales increased on an annual basis across all major geographies as spending on WAN optimization remains a priority.”

On Tuesday morning, adding Riverbed Technology back to the portfolio seemed like a good idea – by the close I was questioning the move.

 

Aruba Networks was destroyed after releasing earnings.  The earnings and revenue numbers exceeded expectations, but guidance was conservative and analyst were  fixated on a sequential decline in Gross Margins.

In line with our expected range of 70% to 71%, total non-GAAP gross margin in Q3 was 70.3%, an increase of 50 basis points from Q3 2010, and a decrease of 290 basis points from Q2 ’11. The sequential change in gross margin is primarily due to higher international sales and our normal variability in product mix. In the near term, we anticipate our total non-GAAP gross margin to continue to be in the 70% to 71% range. Our long-term target range remains unchanged at 65% to 68%.

For a company that is the middle of the hot phenomenon of bring-your-own-device (BYOD) to work; for a company that delivered a 53% year over year increase in revenue; for a company that added a record number of new customers; a 17% beat-down was ridiculous – but who am I to argue with Mr. Market.  Usually after a beating of this nature, it will take at least 3 months for the stock to recover.  I don’t want my money tied up in a dead stock for that long, so I will be looking for an exit from this position over the next few days.

 

MOBILE:

I have added back my short in Research in Motion.  Henry Blodget summed it up quite well in his article RIM is Dead. I closed out my position in ARM Holdings to make room for RIM.

 

This was the most active week I have had in this portfolio in some time.  Hopefully, it is now better positioned for the coming days.

 

Year to date performance: 8 Ballers of Mobile 5.5% vs. S&P 500 6.0%

Disclosure: Long: Apple, NXP Semiconductor, Sina Corporation,  Aruba Networks, Riverbed Technology,  TIBCO, Yahoo, Micro Strategy. Short: Research in Motion.  Positions may be closed at any time.