Category: Investing

Over the years, I have listened to hundreds of companies earnings call.  Any company whose stock I plan to hold over a couple of quarters is required listening.  I love hearing all the numbers and stuff, but mostly I’m  listening for how the CEO handles adversity.  Companies are bound to hit issues from time to time, but how they manage it determines if its a keeper for me.  I love this Steve Jobs story:

Steve Jobs gives employees a little speech when they’re promoted to Vice President at Apple, according to Adam Lashinsky in a new article in Fortune that’s not online yet.  Lashinsky calls it the “Difference Between the Janitor and the Vice President.”

Jobs tells the VP that if the garbage in his office is not being emptied regularly for some reason, he would ask the janitor what the problem is. The janitor could reasonably respond by saying, “Well, the lock on the door was changed, and I couldn’t get a key.”

An irritation for Jobs, for an understandable excuse for why the janitor couldn’t do his job. As a janitor, he’s allowed to have excuses.  ”When you’re the janitor, reasons matter,” Jobs tells newly minted VPs, according to Lashinsky.

“Somewhere between the janitor and the CEO, reasons stop mattering,” says Jobs, adding, that Rubicon is “crossed when you become a VP.”  In other words, you have no excuse for failure. You are now responsible for any mistakes that happen, and it doesn’t matter what you say.  (Business Insider)

After the massive earthquake hit Japan in March, many companies were severely impacted either directly or indirectly through their supply chains.  Analysts were scrambling trying to understand the ramifications based on whatever information was available. Obviously, it was the first question asked on subsequent conference calls.  Tim Cook, Apple’s CEO, addressed it right up front on their April call.

Regarding our business in Japan, we had some revenue impact in Q2 but it was not material to Apple’s consolidated results. We believe revenues will be approximately $200 million less in Q3, and this has been factored into the guidance that Peter provided you earlier in his comments. Regarding our global supply chain, as a result of outstanding teamwork and unprecedented resilience of our partners, we did not have any supply or cost impact in our fiscal Q2 as a result of the tragedy, and we currently do not anticipate any material supply or cost impact in our fiscal Q3.

Several months ago, I sold my position in NXP Semiconductor. NXP is supposedly a leader in the upcoming Near Field Communication (NFC) smartphone technology.   Not only has the stock been a dud, but the CEO’s never ending excuses are irritating. In their last call, he blamed everything except locusts for its pathetic performance.  The earthquake in Japan, the US Debt Ceiling debacle and the slow ramp in NFC all played a roll in NXP missing expectations and lowering guidance.

 “Somewhere between the janitor and the CEO, reasons stop mattering.” 

Aruba Networks’ stock has been pounded.  On May 2, it hit its 52 week high of $36.40.  Three months later, it was trading at its 52 week low of $16.20.  The market hit a rough spot during that time frame, but why was Aruba cut in half?

Sometimes your competitors suck and drag you down with them – especially if the competitor is a bell weather like Cisco Systems.  John Cambers, Cisco’s CEO, wrote the book on excuses.  On their May 11th call, after countless quarters of under delivering he announced a major corporate restructuring.  According to Chambers, this restructuring was due to industry shifts placing pricing pressure across markets as well as government sector austerity measures hampering spending in the pubic sector.

Obviously, if Cisco was struggling – smaller companies must be suffering the same fate.  So, when Aruba reported on May 19th analysts had their radars up for any hint of problems.  Revenue and earnings were both above expectations. Guidance was within range, but analysts wanted more and gross margin were down on the quarter. The company had solid explanations, but it really didn’t matter with Cisco fresh on their minds.  The sell off was on.  More selling pressure was exerted with Juniper Network’s disappointment in July.

It really didn’t make sense to me that all networking company were sucking wind. Recession or no recession more people are accessing the internet everyday.  This requires constant upgrading, expanding  and repairing of corporate and public networks.  Thus, some companies are winning business no matter how much John Chambers cries.

On Aruba’s August 25th call, it proved it’s winning at Cisco’s expense.  The company’s earnings were in-line.  Revenue was above expectations and guidance was raised.  The company grew revenue 47% year over year.  It added over 4,500 new customers in the last 12 months. It boasted of a solid pipeline entering its next fiscal year.  The company also expressed confidence in its ability to grow faster than the market as well as it’s ability to increase market share going forward.

The call was one of the most bullish ones I have heard in awhile.  I suggest you take a listen to it on the company’s website.  I bought a starter position in Aruba on Friday and plan to add as the stock price increases.

Disclosure:  Long Apple and Aruba.

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.

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:

• HTC pays Microsoft a $5 royalty for every Android phone it sells.
• Microsoft signed two new Android deals this week with Velocity Micro and General Dynamics
• Microsoft is currently involved with a legal dispute with Motorola over its use of Android
• Apple has sued HTC and Motorola over their use of Android phones
• Google is facing a legal challenge from Oracle over 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.

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.

 

 

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.