30 April, 2009

Best Month since 1938, not an April Fools Joke

No Foolin'? That's right, the S&P has had the best month since 1938 in April, as Butch & Sundance so poignantly put it all those years ago in the classic film.  The bears have been watching from the sidelines in seems all month long as this Bull Market rally will try to continue into May.

CNBC has broken down some of the monthly statistics here (Link). Several promising signs have been had, especially a leadership earnings role by Technology and a renewed confidence in the banking sector, however a little heed should be taken as the same network touted the potential of Dow 10,000 in the summer.

As President Obama celebrated the 100 day milestone, its clear the American economy is in much better shape now, as opposed to the close of 2008, however it'll have to get much better much quicker than anticipated for the Dow to reach those milestones so soon.

With strategists and economists predicting almost uniformly now that the markets will not be retesting early March lows you can see why Traders are climbing back into the buyers column. Technical, and more importantly, Psychological support has been built into a market that still is off about 35-40% from late 2007 highs. And that's no late April Fools joke.

29 April, 2009

Markets Rise despite GDP data

The GDP dropping by 6.1% versus a 6.3% drop last quarter, could be seen as an improvement, but more so, it continues to paint a tepid picture of the US economy. With economists expecting a drop of 4.6%, according to the Dow Jones Newswires, the realities are still fairly uninspiring.

No matter for the markets however, as the 100-day milestone of President Obama's term approaches, Investors are cautiously optimistic in the direction of the US economy. The Dow, Nasdaq and S&P trackers were all higher Wednesday by about 2% in early trade showcasing some of that optimism. The rally was broad, but Financial and Energy stocks led throughout the morning. Despite calls from the Fed that several banks would require more capital based on the results of the now infamous "Stress Tests", banks have shrugged off the major concerns and have header higher.

Various sources have reported that Bank Of America (BAC) even plans to appeal, their stress test results, to the government in an effort to show it is capitalized well-enough and would not need to drastic dilute shareholders with a market offering. This despite, several bank CEOs, including BAC's Ken Lewis, being on the hot seat with their respective jobs.

The ambitious agenda that President Barack Obama began his administration with has polarized the nation in some respects but brought it closer together in others. Despite news networks dedicated to one side of the argument or the other, the Democrats in power have shown many specific plans and remarkable resolve, and as the 100 day celebration comes to be another Obama media spectacle, the investing community is buying in. But with economic data points showing little to no improvement just yet, time will tell when recovery will truly take hold.

Disclosure: Author holds no position in BAC

22 April, 2009

Technology Market Leadership Part 2: Apple beats again

With the Nasdaq pacing the other market indicators throughout the trading day, it was clear that Technology was on the mind of most Traders.  With eBay (EBAY) reporting numbers to an enthusiastic response, next in line was the mighty folks from Cupertino, waving their iPhones and Macs, sans Legal Copy (If you haven't seen the latest I'm a Mac ads you are missing out on high comedy).

For Apple (AAPL), this quarter was met with tempered expectations.  Charts and Graphs flew across the Internet, projecting the sky was falling for the Mac.  Well not exactly falling, but some rather large chinks in the armor were showing.  Microsoft (MSFT) ads that actually garnered praise! Mac sales at a year over year drop for the first time since 2003! Apple not in the fast growing netbook Market! Pres, Androids, Berrys aplenty! Where's Steve?  I think you get the gist, a lot of shouting and hand waving by analysts and the media, some thoughtful, most not so much.

Even, Apple's number 1 business fan, CNBC's Jim Goldman, in a recent piece was comparing Macs to PCs on price and intangibles, made a point to mention that Macs come with Photoshop!? Perhaps a confused slip of the tongue but nonetheless tried and true stockholders are wondering if anyone outside the Apple circle truly understands the business. And in all likelihood, that's the reason the shares are so under appreciated and victims of manipulation and rumor.

But there's a little something called cold hard facts, and Apple's been providing them aplenty, quarter after quarter.  And with that, providing what seems like quarter after quarter of what I like to call 2/3rds guidance. When will the pros just forget about those last two sentences in every Apple press release.

But now to the hard hitting stuff, the news that matters, the numbers.

  • Revenue: $8.16Billion vs $7.7Billion expected
  • Earnings: $1.33/share vs $1.09/share expected
  • Mac Units: 2.2Million vs 2.1-2.2 expected
  • iPod: 11Million vs 10Million expected
  • iPhone: 3.8Million vs 3.3Million expected
That's as clean a sweep across the board as you can see.  The worrisome figures for most coming in was the Mac line, however this business is on solid footing now as the recent desktop line upgrades start to bring in repeat customers while the popular MacBook designs continue to impress laying Mac styling in front of and towards the general public.  In an economy where the most popular computers across the board are $300-$500 netbooks, Apple is doing very well at its "premium" price points.  The upgraded Mac Mini and the last generation MacBook give Apple some penetration in the sub-$1000 market.

iPhones continue to be big, and not only for Apple.  Analysts were scrambling to revise their iPhone estimates upwards as AT&T (T) reported very strong wireless results as part of their quarterly report.  With 1.6Million iPhone activations (only 300K less comparatively to the holiday quarter) AT&T was quick to point out that iPhone subscriber churn is extremely low (customers love their iPhones) and iPhone ARPU was 1.6 times the average (customers love spending on data plans).

Basically the iPhone's little sister, the iPhone Touch continued to increase in popularity as the AppStore has proven to be an incredible driver of not only adoption, but also loyalty.  With Apple about to cross 1Billion applications downloaded this marketplace becomes the fastest growing software distribution channel in history.  With combined iPhone and iPod Touch sales totalling 37Million units and counting, the install base for developers is only continuing to grow. And as Apple readies the reported and rumored "iPod Touch HD", their curveball into the netbook/tablet market, be sure it'll be accompanied by an AppStore of its own.

How did Investors react to the news? At first nonchalantly, Apple sold off late in the day as worries seemed to creep into the stock.  After-hours however a 3% gain on solid results but sluggish guidance.  The guidance number was partially explained on the call, which I'm sure has yet been properly disseminated.  Apple is recording no Revenue from iPhones sold after their March event of iPhone software 3.0.  This is all due to some technically complex accounting rules that allow their subscription based model to yadda yadda yadda (Insert Legal Copy). In a nutshell, by doing this they can legally give iPhone users the upgrade for free.  iPod Touch users however, are stuck with another Hamilton (Doesn't have the same ring to it as a Benjamin does it?).

Since the software is set to come out in June, that's essentially an entire quarter of 0 recognized iPhone revenue.  Kinda sounds like it fits nicely in the gap between Apple Revenue guidance and Analyst Revenue expectations doesn't it? Provided that the analysts have finally deciphered the enigma code that is Apple's subscription accounting method wherein all iPhone revenues, profits etc are split amongst 8 quarters while the rest is deferred into an ever increasing cash pile which at the moment stands at $29Billion.

To be fair, Apple has begun giving Non-GAAP accounting to try to set Wall St. straight.  And by those metrics, the earnings are just staggering.
  • The Current Quarter: $1.84/share
  • Last Quarter: $2.58/share
  • Quarter before that: $2.74/share

So the last 3 quarters of "real" earnings paint a picture of $7.16/share in earnings for a stock priced at $125. That's a P/E of 17 in 3 Non-GAAP quarters!  Considering the $33/share in cash that Apple holds, that 3-quarter P/E ratio falls to 13. Looking ahead to the next quarter on a Non-GAAP basis and Apple is likely to earn close to $9/share (vs a comparitive estimate of the GAAP earnings of about $5.55/share).

This company is still undervalued, and while their entry into the netbook/tablet space will be closely watched, so will be the return of CEO Steve Jobs.  Rumors and stock market games aside, Apple is an incredible money printing design house and because of its accounting rules it still seems "expensive" to some.  An injustice that will hopefully be corrected as next-quarter analysts will have a full year of Non-GAAP numbers to look over and use in their predictions.  Then maybe it'll be Apples to Apples.

Disclosure: Author owns AAPL, T, holds Call Options in MSFT

Technology Market Leadership Part 1: Ebay's Quarter

Technology was in the spotlight again today. The Nasdaq was the pace-setter in trading all day as a couple heavyweights were set to report earnings.  Online Auction pioneer Ebay (EBAY) and electronics darling Apple (AAPL) continued a slew of positive earnings reports cementing tech's leadership role in the road to market recovery.
The auction business for Ebay had been stumbling for quite sometime, in fact even before the recession, so today's quarterly report may just be what is needed to turn the corner here. Ebay, is trying to reign in its businesses and truly become the global auctioneer.  This was most evident of late as management outlined a plan to take its Skype Internet Phone product and churn out an IPO next year, separating the unit after years of failed synergies.  Ebay also bought a controlling stake in Gmarket, a South Korean online auction house.  Best way to break into new markets? Why, buy local of course!

These recent announcements meant Ebay's dragging share price was finally finding some life, rising 22% over the last month, including 3% today before their numbers. Investors had more to smile about as Ebay delivered a solid report, sending shares higher by 5% in after-hours trading.

Highlights from Ebay included earnings of $357Million ($0.28/share) based on GAAP. Non-GAAP numbers, the numbers that analysts were looking at included profits of $500Million ($0.39/share). Expectations were beat by 5 cents a share and eBay also generated free cash flow of $577Million from its quarterly $2.02Billion in Revenues.  These totals point to overall revenue declines of 8% and profit declines of 11%.  Analysts however, certainly feared for worse.  Ebay guiding within expected ranges also helped its cause in after-market trade.

So where does Ebay's growth and strength come from? PayPal, classifieds and Skype were the main drivers of Revenue year-over-year upside, so the main auction businesses still remain mostly catatonic.  But with Ebay looking to expand its online presence Investors are likely to chalk this one up to the economy.  Auction related business fell 18%, while Skype and Payments (PayPal etc.) growth on a revenue basis was 21% and 11%, respectively.

Granted the online auction slide doesn't look all that fantastic, but with economic recovery the expectation is that this business can pick up again.  With eBay looking to expand into more markets, the additional global reach of the brand will certainly broaden the revenue stream. With its collection of shopping and auction websites, including Shopping.com and Stubhub.com et al, eBay finds its reach expanding into specific niche businesses making it that much tougher for any start up or smaller competitor. Ebay has also ramped up its online classifieds business, and that grew 23% year over year. Taking all these together, CEO John Donahoe's vision and three-year growth targets look that much more likely.

Given eBay's recent run-up it is intriguing but not ideal to jump into the company stock tomorrow.  However, these numbers and the guidance that came with them confirms that eBay is very much ticking and should be watched.

Disclosure: Author holds no position in EBAY

17 April, 2009

The Google Cash Machine

Henry Blodget of Alley Insider probably said it best after Google's (GOOG) Calendar Q1 results crossed the wires: "cash flow will knock you silly" (Link). While the overall economic situation has admittedly hit even the mighty search giant, by controlling costs at unprecedented levels the company was able to generate $2Billion in free cash flow in the quarter. Just Staggering.

Being a heavy market share leader in North America and an even bigger leader in Europe, Google's revenue growth had to come to a halt at some point. The global downturn and recessionary attitudes of advertisers have made that growth halt quicker than previously anticipated. Google earned $5.51Billion in revenue which was a 3% drop quarter over quarter. When factoring in Traffic Acquisition Costs, Revenue came in at $4.07Billion vs the $4.08Billion expected by the street. Pretty much in line there.

Earnings pre share blew past expectations and even increased from the December quarter on a non-gaap basis. $5.16/share this quarter versus $5.10/share last quarter and $4.84/share last year. The bottom line expands while the top line contracts, the textbook cost-cutting profit driver. This also precipitated a similar uptick in operating margin, which was at 34% and 39% on a gaap and non-gaap basis, an increase of 1% and 4% from a quarter and year ago, respectively.

The cash is the real story here though, and even though management is very conservative with its $18Billion war chest, the company now generates from its operations enough cash to buy General Motors, twice! Every 3 months! What's even more remarkable about this is that it isn't some oil baron, or enormous retailer, it's a silly-named 10 year old Internet search engine that dabbles in advertising. To say Google dabbles in advertising is of-course the understatement of our still young century. The company has moved in and out of, with some great and some not so great successes, every form of advertising, but now more than ever is the Internet advertising sector helping it tremendously as rivals are sputtering.

The general nature of Internet browsing was built on the basis of tracking capabilities, and as the generation of today puts more and more of its life online advertisers are looking to target with greater accuracy driving substantially higher ROIs. And guess who's the best at delivering high ROIs? Google of course. As dollars keep shifting online, where ROI is trackable and higher, Google stands in the best position to keep reaping the benefits. And if the company is doing this well keeping costs under control and generating cash flow in struggling economics, it'll be that much better riding along on the road to recovery.

While there are some chinks in the armor, bears would be quick to point out Revenue decelerated for the first time ever and the company is going into 2 straight seasonally weaker quarters. A seasonality weakness that will only be exasperated by current down-trending economics. But with its main rivals continuing to stumble over and around each other (Microsoft search bleeding cash while Yahoo struggles with an identity crisis), Google can afford to run its main business efficiently and look into further growth areas such as Mobile and online productivity applications.

Google has built itself such market and mind share in search that it can certainly sustain itself on that future hardly breaking a sweat. But if DoubleClick, YouTube, Google Apps or Android start to make the company any serious cash, watch out below, because the company will then be on a blistering pace to reach its own lauded goal of being a $100Billion yearly revenue generator. While response to the latest numbers has been tepid to say the least, Google at $400/share, looking to make roughly $20 in EPS and having a free cash flow rate of about $8Billion yearly just screams must-own. With each passing quarter it is making less and less sense owning second best.

Disclosure: Author owns GOOG

13 April, 2009

A Tale of Two Cities: Easter News and Notes

A tale of two cities, screams to be profoundly appropriate in describing the current climate of the American markets. Those two cities of course would be Detroit and New York. Symbols representing two pillars of the American workforce and economic prosperity. Both the auto and financial industries have been decimated by losses, layoffs, and market indifference, producing for some, the biggest market fall since the crash associated with the Great Depression.

Detroit's auto stocks are still in tatters, and the news did not get much better. The US Treasury has provided General Motors (GM) with a specific set of instructions for the preparation of Bankruptcy on June 1. It looks less and less likely that GM will be able to avoid that scenario and Investors showed no confidence in any alternative as Monday's trade saw GM give back 16% to the $1.70s.

To counter that, New York was having a fantastic session as the optimism from the Wells Fargo Corp (WFC) pre-announcement of profitability sustained financial momentum. With important earnings announcements upcoming, Goldman Sachs (GS) and Citigroup (C) Investors are seeing a renewed confidence in not only profitability, but the ability of the government to do what it has set out to do. Rid the financial books of terrible assets.

Analysts estimate Goldman to earn about $1.30/share, but the street has begun its whisper-practice and with Goldman still seen as the strongest of the Wall Street brands the company is expected to beat its own number and handily. Citigroup, having alerted the market to profitable months in January and February is looking to continue, despite the accumulated average estimate of a $0.37/share loss (according to Yahoo finance). Goldman will likely set the tone for the banks, and if others in the sector can surpass their estimates it will go a long way to support this current market rally, and instill the type of institutional confidence that is needed to make the latest gains sustainable.

Also in the news over the weekend, besides a thrilling Masters golf finish, was reporting from the Wall Street Journal (Link) that Apple's (AAPL) iconic CEO Steve Jobs, is in fact still very much in the picture and involved in design and business decisions. Word is that Jobs was very much involved in the interface of the latest iPhone OS, version 3.0, and is also involved in the creation of the much-heralded Mac tablet/netbook device. The return of Steve Jobs, from a 6-month medical leave has been a cloud over Apple's stock despite sales growth and product innovation from the company. The recession may have curbed consumer spending habits severely, and Apple's premium brand did suffer, according to market research statistics, but with the company continually improving its Mac Computer and iPods lines recently and an upcoming iPhone announcement surely in June, Investors have begun to set aside worries about Jobs.

Should Jobs return on schedule and lead the next phase of iPhone evolution, expect resonant cheers and analyst upgrades on the anticipation of the next phase of Apple's product road-map. In fact Kaufman Bros. Shaw Wu conceded Apple's value in his latest report, bumping his price target to $150/share.

News reports of the rally's sustainability have been mixed, with some expecting negative trends to overshadow any glimmers of recovery. Thsoe glimmers however, are due to get brighter if the financial sector continues on this path of pre-announced profitability.

06 April, 2009

Smartphone Wars to heat up this Summer

The new hotness, no not Twitter, but the smartphone, is gearing for an all hands on deck gadget war this year and beyond. While smartphones have been around for sometime, it was only until recently (read: iPhone) that momentum has picked up faster than Usain Bolt. With two main rivals now leading the charge, Research In Motion (RIM) and Apple (AAPL).

This isn't a 2 horse race however, nor will it be over soon. As RIM executive Jim Balsillie recently said on the company's conference call in baseball terms, the smartphone wars are somewhere in the 2nd inning. What may seem like an Apple and RIM race to win, certainly can be turned upside down with entrants from all of the world. Although smartphones account for less than a third of the phone market, they command nearly 90% of the media coverage and almost all of the growth. According to Mobile Advertising Network AdMob, smartphone share increased from 26% to 33% in the past 6 months. This growth trend seems likely to continue as popularity in these devices continue to gain and subsidies for the most popular devices reign in even the most worrisome economic consumer.

Although Nokia (NOK), may be the biggest phone maker in the world, its smartphones have yet to inspire consumer desires such as the iPhone from Apple or the Blackberry Bold from RIM. Although by sheer volume, Nokia with its range of models holds 3 of the top 5 most popular smartphones spots globally, trailing only the aforementioned iPhone. Trends are shaped by consumer decisions as well as the push from corporate entities, and as such none of these companies are standing still, nor can they afford to.

What's on the horizon then? An analyst at Barclays is reporting that Apple has doubled iPhone production in anticipation of new models coming in June (Link). Recent iPhone speculation has pointed to not one but two phone models expected out of Cupertino this time around, conveniently coinciding with the release of Mobile OS X software version 3.0 in June. When Apple reports results for the first calendar quarter of 2009 it will surely surpass 20Million unit sales for the iPhone, not too shabby in about a year an a half.

With the AppStore becoming a global phenomenon Apple is making it extremely tough for users to ever switch away from an iPhone. If you've spent hard earned money on applications to make your phone function exactly how you want it to and have the features you want, you'll of course be less tempted to switch to something else if it means losing those precious applications. When iTunes purchases only worked on iPods for all those years, it drove an upgrade cycle for the company like nothing the music industry had ever seen.

RIM, fresh off the release of a new Curve, the well-received Bold and the mixed touchscreen Storm, has had information leak out about 3 new devices codenamed Onyx, Driftwood and Magnum. This coming from a company that had shipped almost 8 million devices in its most recently announced quarterly results, sending shares higher by 20%. RIM is certainly hard at work, but its not an easy task convincing the general public the virtues of a Blackberry. Always the device of choice for the business user, as smartphones have become increasingly consumer-focused RIM had a tough balancing act to strive for. For the most part, judging by the results, RIM has done very well. Initial critical thrashing of the touchscreen Storm notwithstanding the device has been successful and further forays into iPhone touchscreen territory by RIM will likely be greatly improved. And not a soul can say negative things about the hardware RIM uses for its keyboards, they are always top-notch.

Palm (PALM) has somehow starting erasing its name from the gravestone it was surely destined to have after several quarters of significant losses. The driving force for the resurgence! A little device by the name of the Palm Pre. Wowing audiences earlier in the year with iPhone-like admiration, the Pre is set to launch in the US soon, followed by International markets later in the year. There still is much at stake for Palm, but the feedback thus far has been incredibly positive on the new device, and with the work put into Palm's WebOS platform the company, and consumers, expect a wide range of WebOS devices going forward.

Google's (GOOG) Android has had a rather slow start but will likely pick up steam in the latter parts of the year as not only a second handset from HTC, the company that produced the G1 for T-Mobile, is due as well as multiple devices from Samsung. With carriers in the US and abroad looking at, adopting, and testing Android, it seems only a matter of time before Google's vision of hundreds of Android phones becomes a reality. T-Mobile is even talking about launching Home phones and netbooks running Android, and a recent story about HP had the company confirming it will be testing Android for its netbooks. The free, open-source platform has proved resilient despite some questionable early roots, and as the platform stabilizes and is available on more handsets and in more incarnations consumers will increasingly see Google's web based products, and ads, within their mobile world.

Like Google, Micrsoft (MSFT) has only been providing software for smartphones, however all the momentum a bloated Windows Mobile has garnered in the past has seemingly been lost in the past year. With flashier devices like iPhones, Blackberrys, Androids and Pres being on consumer minds the battle remains uphill for Microsoft. A software overhaul is needed for Windows Mobile and it certainly doesn't help the company that it announced a visual overhaul (Version 6.5) but slated it for release at the end of this year, while a proper, better Windows Mobile 7 is scheduled to come sometime in 2010. Microsoft can't afford to wait much longer as Android gains momentum, and while the other most popular smartphones all run their own platforms.

All in all, consumers will have an abudance of choice in 2009 and beyond, and as their devices do more things they need, the world as we know it will change from the at-home/at-work Internet dominated era to the mobile/on-the-go Internet dominated era. The one constant is being connected and with each software platform making a better Internet experience each time around the debate surrounding Internet browsing is fading. The only way to get ahead in this game is to bring incredible new features (such as 3rd party applications) wrapped in elegant hardware that consumers feel inspired to purchase and use. While Apple and RIM are leading in that sense now, by the time this year's crop of devices are released we may just be nearing the bottom of the 4th.

Disclosure: Author owns AAPL, GOOG, owns long-term call options on MSFT

02 April, 2009

Rally Continues past April Fools

The 2nd of April, typically a let down day for pranksters has markets rising like the Sun in the East. North American markets had spent March on an absolute tear, had the Madness from the NCAAs spread to the trading floors or was there finally something to be optimistic about?

Well, first and foremost the G20 summit has economists, investors and the media talking, which is always a good thing, especially if what's being talked about is recovery. Not only recovery, but how to get there. The month of April has opened with positive market gains despite a jobs situation in America that if taken by the numbers seems as dire as ever. Jobless claims rose to about 670,000 in America at the end of March, as high a figure as has been seen since 1982, but the G20 leadership, and that leadership's commitment to economic strength going forward has investors optimistic.

The latest reports out of the G20 summit have leaders close to agreements on stricter financial rules, including the use of tax havens, and a planned influx of money to the International Monetary Fund in order to help fight the global recession. This total could reach upwards of $1Trillion based on the unveiling of the plan by Britain's Prime Minister Gordon Brown.

It isn't just the G20 that has been providing the spark of late. In the Auto Industry, one of the hardest hit by the curbing of consumer spending, Toyota (TM) showed a sales increase of 18% in March, compared to February of this year, which led of a Vice President at the company predicting that Toyota has seen and moved past the bottom in slumping car sales. Toyota is up 14% in the last two sessions.

Piracy, a long and hotly debated issue came to the forefront of the press yesterday as a major 20th Century Fox motion picture was leaked online a month before its theatrical release. X-Men Origins: Wolverine, which is a follow-up to the hugely successful X-Men franchise for Fox and its parent News Corp (NWS) and based on the characters created by Marvel Entertainment (MVL), was set to be a summer blockbuster and tent-pole film for the studio. An unfinished, but DVD quality version of the movie somehow found its way around the Internet for fans and commentators alike to have a look. How this plays out in the month ahead is guess-work but bad word of mouth amongst the core fan-base could spell trouble for Fox, which is coming off of an abysmal 2008 movie year.

The first weekend box office for comic book movies depends heavily on the core fan-base and intelligent marketing, but if the movie doesn't live up to expectations and the core fans get to see it in nearly completed fashion a month prior to release, the effects of piracy will be felt harder here than ever before in Hollywood. News Corp, being the giant conglomerate that it is, is unharmed for now as the stock has risen 7% today along with the broader market.

Today's continued bullish sentiment was broad, with seemingly all sectors moving higher. The Dow, which has broken 8000 this morning is joined by its American benchmark brethren with gains of nearly 4% as of this writing. Question is, should investors be cautious for when the Sun sets in the West in the weeks ahead?

Disclosure: Author owns MVL