Category: Investing

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.

Since the release of the iPhone in 2007, I have focused a large percentage of my investing dollars in stocks in the mobile industry. Initially, I traded the device makers Apple, Nokia and Research in Motion.  My love (mostly) hate relationship with RIMM is well documented on my blog.

After reading the Morgan Stanley Internet Report in December of 2009, my emphasis shifted to identifying companies that I believed would fail to make the transition from “old school” cell phones to mobile computing.   My article “The Four Mules of Mobile” initiated months of “debates” on whether certain companies would crash and burn.  I am currently not short any companies, so there is no need to get riled up about me hating on your favorite device maker.  I am now on the third permutation of my mobile strategy that was outlined in my blog “Mobile Stocks that Got Game.”

Over this 3 year period I can’t recall owning Google for more than a week or so here and there.  Google is without a doubt a major force mobile.  Android is growing like weeds.  So, how can a mobile strategy not include Google?  The bottom line is that not all great companies have great performing stocks.  Since January 3, 2007 to date Google is up 28%.  That’s a little over 9% per year.  That’s better than a sharp stick in the eye, but  that doesn’t make my cut off. As a stock trader, I have one requirement for my portfolio companies – its stock must go up A LOT!

There is something that has always bugged me about Google.  It has nothing to do with P/S, PEs or anything like that.  It’s that 99% of the people that use Google products pay absolutely nothing to use it [99% is an exaggeration].  I realize that Google is a very profitable company and generated $8.4 billion in revenue last quarter.  However, I believe with so few people paying to use Google products it inhibits the company’s ability to maximizing profits.

Eric Schmidt, CEO, once rhetorically asked “If we have a billion people using Android, you think we can’t make money from that?” All it would take, he said, is $10 per user per year. In my previous life, I worked as a software sales guy for a high tech company.  There was absolutely nothing in the world harder than increasing the price of a product.  Customers hated it.  I don’t believe a $10 user fee would generate the $10 billion business as Schmidt suggests.

In contrast, Apple generated a $10 billion dollar iPad business almost overnight.  While Google suggests, Apple executes.  I believe that Google’s stock price is going to continue to disappoint until it proves that can create other multiple billion dollar business units other than search.  In the mean time, there is absolutely no reason for me to tie up capital in Google while it gets its act together.  The opportunity costs are too high.

Disclosure:  Long AAPL.

The advent of ETFs have been a great addition to the trader’s toolbox.  I find them quite useful when looking to quickly gain exposure to a trend of interest.  One of my favorite trends is the growth of the middle class in emerging markets.  As their wealth increases, consumption of items such as autos, housing and travel increase. The Brazil Consumer ETF (BRAQ) is a great way to leverage that trend in one click.

There are many other benefits especially when attaining information on investments is difficult or when stocks of interest are not traded on US exchanges.  In spite of the benefits, individual investors can easily outperform ETFs, if they are willing to do the work.

I have been following the Smartphone Index (QFON) since it was created last year.  It is a benchmark for the telecommunications sector focused on wireless, mobile devices and advanced communication functionality.  It includes companies that are primarily involved in building, design and distribution of handsets, hardware, software, and mobile networks associated with the development, sale and usage of smartphones.  An ETF (FONE) based on this index was just launched a few weeks ago.

From day one, I realized that the Smartphone Index was flawed.  The index only looks at the consumer side of the equation.  The enterprise side may not be as large, but it may be more valuable for a savvy investor.  This point became more apparent while reading Aruba Networks most recent earnings press release.  The CEO said the following:

We continue to see broad demand for our mobility solutions across all major geographies, as evidenced by our record revenues, 50% year-over-year growth and 13% sequential growth. Enterprises are facing intensified proliferation of tablet and smartphone devices, and IT’s ability to rapidly and affordably deliver secure mobile access for these devices is critical. This requires a user-, device- and application-centric approach to the network edge. We believe that the enterprise network is transitioning from a wired centric to a mobility centric architecture and the market is recognizing Aruba’s unique ability to address the requirements of this new architecture. During the quarter, we saw robust growth from the general enterprise and our core verticals, an increase in the number of larger potential deals in the pipeline, and the addition of a record 1,000+ new customers.

Over a 1000 new customers!  Mobile growth in the enterprise is exploding and it is not represented in a newly created ETF.  That’s an oversight that is not excusable.  On the other hand, that creates an opportunity for the individual investor to outperform.

As discussed in previous blogs (Mobile Stocks That Got Game), I am leveraging the smartphone trend through my “8 Ballers of Mobile” portfolio.  I used last week’s weakness to give the boot to an under performer and filled my remaining open slots.

New Adds:

Sina Corporation: It is very frustrating not being able to invest directly in some of the hot social media companies like Facebook or Twitter.  However, Sina has gained attention as a Chinese version of Twitter.  Here is a great overview of Sina’s Twitter like capabilities (Inside Sina Weibo).

Arm Holdings: Is a no-brainer and should have been included in my original portfolio.  Arm designs are used in more than 95% of the world’s mobile phones.

Aruba Networks: If the CEOs statement above didn’t get you excited – listen to their conference call.

Deletions:

F5 Networks – Should have been removed after their last earnings call (F5 Networks on Punishment), but better late than never.

8 Ballers of Mobile *

Semiconductors – underly the entire mobile ecosystem powering the devices and networks.

• Qualcomm
• NXP Semiconductors
• Arm Holdings

Networks – provide the basic infrastructure to enable anytime, anywhere computing.

• Aruba Networks
• Riverbed Technology

Apps – software ranging from office productivity to games and social networking.

• Open Table
• Sina Corporation

Platforms – framework that enables developers to create apps.

• Apple

* 8 Ballers of Mobile is an intermediate/long term strategy.  I trade many other mobile stocks on a short term/swing basis.

Disclosure:  Currently long all stocks in 8 Ballers of Mobile portfolio.  Also long F5 on a swing basis.

Near Field Communications (NFC) is the buzz word of the day.  NFC will enable users to make purchases by waving a mobile phone near a payment terminal – essentially making your phone an electronic wallet.  Also you can finally say good bye to all of those loyalty cards bulging out of your wallet.  That’s enough to make me want one.  NFC has been around for awhile; however, the rumor that Apple plans to embed NFC in iPad2 and iPhone5 (Bloomberg) has taken the buzz to the next level.

NXP Semiconductor (NXPI) is one of four NFC chip companies identified in my blog “Semis Waiting on an iPhone Tear-down to Rip.”  On Friday, the stock traded down 3.5% on 2X normal volume.  This is rarely a good signal especially with the market trading up.  Making matters worse, NXPI reports earnings on Tuesday before the market opens.  The market has not been kind to stocks that disappoint.  Cisco is the latest to be woodshedded.

Taking all of this information into consideration, in my opinion, the market is saying SELL or at the very least buy some protective puts.  That being said, the tea leaves are never that easy to read.  On Friday, while NXPI was selling off someone was loading up on Mar 25 Calls.

If you are not confused by now – throw this into the mix.  If NXPI is going to be included in the iPad2 – the company would almost have to “show their hand” on the conference call.  Inclusion on the iPad would significantly increase their revenue, thus requiring an increase their earnings guidance.

If this stock market stuff was easy – everyone would be rich.

Disclosure:  Currently long NXPI.  That may change before Monday’s close.