31 July, 2009

End of July Market Musings & Microhoo deal

As another month comes to a close, the market's resistance proof rally continues on the strength of strong earnings and more signs of a waning recession. GDP numbers out for the previous quarter showed a decline of 1% in American GDP, this was better than the expected 1.5% decline, which showed economists that slowly but surely the United States is making its way out of the recession.

But the markets knew that in March right?! As the S%P continues to fly from March lows of near 650 to to cusp of 1000 yesterday. Just about a 50% rise for the broad market indicator. The real driver of this continuing rally is the strength in Corporate Earnings this quarterly season, which will be a difficult act to follow for the remainder of the summer as those results fade and current unemployment rears its head again. However, companies now have learned, adapted and retooled their operations and streamlined their businesses during the economic bottom (1st quarter of this year) and are now awaiting the increases in demand that are expected to come in the 2nd half of this calendar year.

On the deal front in recent news, was the Internet Search deal between Microsoft (MSFT) and Yahoo (YHOO). By combining search operations to Microsoft and sales operations to Yahoo the companies hope to put a dent into market leader Google (GOOG). However, the deal has widely been panned for Yahoo, with Investors sending shares down heavily in the few days after the deal was officially announced. The partnership is a revenue sharing one with no payments made upfront and is a far cry from the $40Billion buyout offer Microsoft initiated, nor is it even close to the $1Billion Microsoft most recently offered in cash along with Billions more in stock purchases.

The news media certainly has the right grasp, as the deal, which Yahoo had always held the upper hand on, has gone completely to Microsoft. Yahoo essentially gave away 20% Market Share in search, for cost savings and the chance to deal with all the sales hassles related to Search Advertising between both companies. Microsoft will now control about 28% of search queries through its new Search Engine but it still has a ways to go to get to the monetization levels Google has spent the last few years achieving. And that doesn't even begin to mention the complexities in integration relating to the now-coined "Microhoo" partnership. Executives at both companies expect this to take 2 years to get through fully. That's about half a lifetime on the Internet I'm afraid, so while Google will wave its hands and put pressure on both companies to drag out the legal battles, secretly they've got to be happy, as 2 years of distractions await their newest competitor, now with 8.5% market share, Bing!

Disclosure: Author owns GOOG

23 July, 2009

That's why they call him the Oracle of Omaha...

Recommended Reading (Link): Interesting take from Bloomberg today on Berkshire Hathaway and its iconic Investment Mind Warren Buffett.

In short, in the midst of the financial crisis the "Oracle of Omaha" pledged support for Goldman Sachs in the form of a $5Billion investment of preferred shares and warrants to purchase $5Billion in Goldman common stock.

Mr. Buffett, for his company Berkshire Hathaway, has since made $2Billion in profits on paper on these warrants, since Goldman's earnings blowout and subsequent climb to the mid $160s. The warrants give Berkshire the opportunity to purchase Goldman shares at $115 anytime within 4 years. Not to mention the preferred shares are paying out $500Million in annual dividends.

Disclosure: Author owns Goldman Sachs

21 July, 2009

Apple earnings on tap after Tuesday's close. [Update]

Update: Apple's reported earnings included.

What can Apple Investors and traders expect after the bell today as one of tech's giants reports its June quarter? Well if one thing is certain with Apple, each line of business will be speculated on ad nauseum starting at about 4:30PM Eastern Time.

Likely much of the focus will be on the Mac and iPhone businesses. New price cuts for Mac Computers were implemented recently and according to shipment data and analyst reports, this could be a driver for higher unit sales and perhaps, less than hopelessly conservative guidance for September. The launch of the iPhone 3GS was a great success in the middle of June, which will likely prop unit sales significantly above previous expectations, however comparisons against the iPhone 3G launch are far more difficult as its launch window fell at the beginning of the July-September quarter of last year.

Of course, analysts will ask the company about Steve Jobs, who returned to work towards the tail end of June, after a 6 month medical leave. The company has come under intense scrutiny for not commenting on the health of its CEO, however, it goes without saying everyone in the extended Apple community hopes for good news for a long time to come on that front.

So, to the quarter. The average analyst estimates paint a picture of Profits at about $1.17/share on Revenue of $8.2Billion. Slowly as the quarter has come along, analyst numbers for Apple's unit sales have crept up and with that too went the Revenue target.

Year over year comparisons vs estimates for the quarter are as follows:

  • 2008 Macs: 2.496Million Units vs 2009 Macs: 2.5Million Units
  • 2008 iPods: 11.011Million Units vs 2009 iPods: 9.5Million Units
  • 2008 iPhones: 717,000 Units vs 2009 iPhones: 5Million Units
Actual June quarter 2009 Unit Sales:
  • Macs: 2.6Million Units
  • iPods: 10.2Million Units
  • iPhones: 5.2Million Units
Now, with Macs expected to be roughly the same in terms of units and iPods down year over year, the real growth story is the iPhone. A year ago, there was incredible pent-up demand for the iPhone 3G, which led to the units sales figures in 2008 for the quarter. This year, analysts are far more optimistic with the iPhone, and have already had some help as Apple announced first weekend sales figures of the iPhone 3GS at over 1Million units.

While those 3 major product lines represent the bulk of Apple's cash creation business, not to be overlooked are the percentage of revenue that is derived by iTunes, the AppStore, Software and other accessories. Last year the Music, Software and Other categories of Apple's business represented $1.76Billion in Revenue.

Revenue Breakdown for June quarter 2008
  • Macs: $3.60Billion
  • iPods: $1.68Billion
  • iPhones: $419Million
  • Music, Software and Other: $1.76Billion
iTunes continues to grow as the online music destination and the AppStore which had no presence a year ago has gone on to become the biggest software platform in the world today with over 1.5Billion applications downloaded. Yes, most applications sold are "free" and Apple makes very little profit from this even with its 30% share of Revenue, but this drives adoption of iPhone and the more expensive iPod Touch units which drive margins higher.

While it will be hard to maintain gross margins of 34.8% given price cuts on the Mac line and the back to school iPod Touch promotion, it is possible for Apple to maintain these levels given the increased presence of the iPhone in terms of Revenue and Profits.

Total iPhone units sold to date represent 21.17Million Units and with another 5Million units estimated in this quarter it'll bring the total to about 26Million units sold to date and given Apple's deferred Revenue accounting this running total is very important as all iPhones are still contributing 1/8th of their sale price to this quarterly report.

WC Power Tech Fund Investment Blog Revenue estimates for Apple's Quarter:
  • Macs: $3.3Billion in Revenue vs. Actual Mac Revenue of $3.329Billion
  • iPhone: $2.1Billion in Revenue vs. Actual iPhone Revenue of $1.689Billion
  • iPods: $1.25Billion in Revenue vs. Actual iPod Revenue of $1.492Billion
  • Music, Software and Other: $2.1Billion in Revenue vs. Actual Other Revenue of $1.827Billion
All told, $8.75Billion in Revenue, given similar margin treatment as a year-ago, which brings profits on 890Million shares outstanding to the $1.40/share level. If this is similar to what Apple officially brings to the table today after the close, the bulls on the stock, will have something to continue to cheer about, despite the increasingly hollow guidance-chasing game.

Apple's results:
  • $8.34Billion in Revenue
  • $1.38 Basic EPS (890Million Shares) & $1.35 Diluted EPS (909Million Shares)
Disclosure: Author owns AAPL.

14 July, 2009

Goldman, Johnson earnings upsides lead choppy day in the markets

Goldman Sachs (GS) was the center of the banking world over the last 2 days as an upgrade of the company by its lonesome propelled the entire financial sector higher to start the week. Today the numbers came and they were impressive.

Goldman, still as black-of-a-financial-box as there is on Wall Street proved that its formula still prints greenbacks. Despite an over-the-top piece in Rolling Stone magazine calling Goldman Sachs a money-sucking 20,000 Leagues Under The Sea creature, the bank just keeps on rolling and keeps on paying its employees. After taking in $13.8Billion in Revenues (vs. $10.6Billion estimate) the company set aside over $6.65Billion for employee compensation and earned $3.44Billion, or $4.93/share. The bright-eyed Wall-Streeters were expecting a still brilliant but in hindsight subdued $3.65/share in profits. Yes Goldman is taking on more risk with the VAR (Amount Goldman can lose every day) number climbing on a year-over-year basis to the $240Millions from the $180s Millions but GS has proven time and again to be the most adept at assimilating increasing risk, and with no TARP monkey on its back, the bank can continue to attract that top-prized talent, and compensate that talent well past market standards. Goldman stock is virtually flat today, as most gains were made yesterday on the pre-earnings analyst upgrade. A complete break-down of Goldman's earnings announcement is provided by Bloomberg (Link).

Despite Goldman tripling of its lows of $50 in November, and a double from its recent dip in March to $75, the company stock at $150 is still off of 2007 highs of $250/share. Now it certainly wont be easy to get there soon, and even the mighty Goldman will need economic help to continue surging, however it is the best company in its sector and despite a 77% upside performance year to date, it is a financial institution that is leaving its competitors in the rear-view mirror faster than any other industry leader can boast.

Johnson & Johnson (JNJ), the consumer giant, was also on tap in the earnings game and after a pre-market spike, the stock came back to hover up only about a single percentage point. Despite lower profits on a year-over-year basis JNJ still beat expectations and turned markets from a bearish tone into one that was decidedly more bullish. The ongoing recession, turbulence in global currencies and competition from generics were the main causes of blame for JNJ's 3% drop in earnings, however spending cuts and a tighter business belt helped the health company beat expectations in the quarter.

JNJ reduced spending on administration, research and sales by about 13% and reduced production costs by 6% according to Forbes. The company earned $1.15/share (vs. 1.17/share last year and estimates of $1.11/share) on $15.24Billion in Revenue (vs. 16.45Billion last year and estimates of $15Billion). So although both the top and bottom line numbers were down year over year, the company managed to top estimates on both important metrics in a economic marketplace that was called by the company CFO as one of the most difficult in company history. The company stills right in the middle now of its 52-week range, and with a yield of over 3% is an attractive consumer staple for a balanced portfolio. With re-assurances from management on 2009 profitability, its a name that will give steady market performance despite dragging American unemployment.

Disclosure: Author owns GS

08 July, 2009

Google's Vision of Life to be Subsidized by Advertisers

The techno-worlds of open-source and standards-compliance are united in celebration on the heels of Google's (GOOG) announcement of a new and upcoming platform called Chrome OS. A new giant has awaken to try and breach the Windows stranglehold of the modern world. Free and widely available Linux couldn't do it, the fawned-over and renowned Mac OS X still can't do it, but perhaps the quirky little giant that is Google can lead a way towards universal, free and open salvation.

Google's announcement that it is in fact working on a full fledged Personal Computer Operating System shouldn't really come as a surprise given that over the past year and a half it has launched the Android OS for Mobile Devices and Chrome, the first browser to have individual process management, a staple of every flavor of operating system in the modern computing world. Rumors of Google's OS work span back years in the blogosphere, but nothing was concrete until today's unveiling of Chrome OS, an operating system to run on full household computers based on Google technology and an open source Linux under-pinning.

By marketing this move into Operating System territory on the back of its growing Chrome browser user-base, Google is squarely taking a web-centric view of the computing world. Coincidentally, after years of perpetual beta, Google removed the beta label off of several products in its Apps suite, charting a path towards an enterprise serious attitude that the company has of yet never employed. First Google Apps gets a fresh coat of grown-up paint and now Google eyes the netbook market as the first for its full fledged operating system. Microsoft (MSFT) better not turn a blind eye to these threats like it has to others who have tried to vault into its dominant space.

After mostly shrugging off Apple's jabs at Windows Vista and watching itself slowly but surely lose some market share, it still took the worst worldwide recession in generations to get Microsoft's attention to start firing back at competitors. This is a company that cannot afford to rest on its laurels, nor one that can afford to blow dollar after dollar in a blinding struggle for relevance in markets that it is an also-ran in (i.e. Internet Search). Google's head on assault began years ago as it made the web (and inherently itself) the first destination for millions of computer users, then it got them hooked on a new way of looking at e-mail, then followed that with calendars and slowly simple documents and spreadsheets, all while being dismissed by market leaders as too simple or too weak for real use. Newsflash to those competitors: Majority of people only really need simple and weak, and powerful office suites and complex operating systems exist on most computers because there was no other choice!

The web browser is the portal to the new technology world and Google, Microsoft and Apple (AAPL) all know it, however Google's become the most nimble of the three at being able to adapt to it. Chrome was a starting point, and while getting 30 million users in 9 months is a good start, it is still just a tiny fraction of the web population, so Google's got a long way to go before it can claim the browser Chrome a success. Chrome OS on the other hand is a different animal, it'll be the only thing users need to get up and running on a new computer while having simple native tasks be quick and web tasks even quicker. As new web technologies evolve along with the growing presence of "offline" web apps, there was still always a need to have some distinction between the browser and the operation system. That line is blurring and perhaps Google's figured this out and may just have found a way to combine the two under Chrome's umbrella. Brilliant, if it were available today, but unfortunately for Google and its users the creation of a platform needs the help of several building partners, since no one buys an operating system off the shelf these days. Except of course for loyal Mac purists, which love having their Mac OS X be the latest and greatest, and given Apple's pricing commitment to the next version of OS X its a hard upgrade to pass up. Kudos to Apple for figuring out people can still want to buy software off the shelf.

$29 for a new version of an operating system, that's an incredible price from the folks at Cupertino, and something Microsoft's bean-counters certainly cannot match with Windows 7. However, someone can, and that someone is Google! Chrome OS, like the Chrome browser, is of course based on open-source software, and in and of itself will be open-source, just like Google's Android OS is for mobile phones. What that means is that Chrome OS will cost NOTHING to computer manufacturers who will shoe-horn it into the netbooks/laptops/desktops of the future. Tough to compete with free! Especially if its quality free from a source as reputable as Google.

But herein lies the rub, what's in it for Google? All these free services and platforms can't just be a secret desire to topple the greatest technology behemoth of all time, can it? Of course not, Google's clearest path to monetization is to get users onto the web as quickly, efficiently and distraction-free as possible, because it wants to be the one doing the distracting with advertisements of all shapes and sizes, from text ads in search, to display ads on the network, to video ads on youTube and everything else under the sun. How do you provide web users the easiest route to the web? Well build your own free multi-lane uber-autobahns with Android and now Chrome OS. The two pillars of the web of the future and Google will have troops at each one, mobile and home computing.

The more time users spend on the web, and the more tasks they begin shifting to the web, the better for Google and the more opportunities Google gets to serve up ads from its vast and numerically superior stable of advertisers. This is why Google is free, in its eyes Life should be subsidized by advertising, and advertising of the future will all become Internet based and completely traceable because it gives the advertiser complete metrics and Return-On-Investment calculations to the tiniest detail that are unmatched in any other ad-based marketplace. And as Televisions and Radios become Internet enabled in the future, bet Google will be right there with the expertise to build out a similar type of ad network. Google is more than willing to subsidize its own development costs if its able to produce a pathway to a Google-centric web that others wouldn't or couldn't replicate.

As encompassing as technology and the web already are in everyday life, we've yet to scratch even the earliest of limits, with every piece of new technology becoming web-enabled the inter-connections between people and their technology becomes further encompassing, with the cloud becoming a centralized hub forcing information separation to consist only of virtual borders. A prospect not completely sold to business just yet, but the power of the crowd, and the cost-effectiveness of the cloud will break down those barriers. How will all this happen, and who will pay for it? As Mark Cuban recently wrote about the prospects of free business, the biggest problem is the continued expectation of free and the inability of the biggest pushers of free-service to keep costs in check and monetization opportunities plentiful. That thesis is very much on the mark, no pun intended, by how it related to business, but what it misses, is the relationship of consumers as the end-goal for the real buyers of free: The advertisers.

The Internet, being the disruptive technological platform that it is, essentially drives costs of everything to near zero. This is due to the simple phenomenon that if everyone is connected to everything, there's always someone who'll do something for cheaper, until the cost of that something is driven close enough to zero to become minuscule. And the ones paying the bills at that point will rely on advertising for profitability, and the advertisers will rely on their ads working to then sell products and services and in turn pay their own bills. Google just happens to be the biggest entity making use of the free economy that is the Internet, using all of its advertisers to pay for its storage, bandwidth and corporate costs.

Advertising is funding an over-indulgence in all things web, but subsidizing life, that seems like a stretch right? Currently yes, but as the computer and the Internet is engulfed by all of the younger generations for communications, commerce, entertainment, social networking, dating & relationships and more, it will start to look startlingly close to the major components of life.

Imagine if the brick & mortar world worked this way? Say there was a Google that would pay for everyone's gasoline, provided they had a billion lane road to a super-shopping center, and drove a car they purchased but had customized by Google to point out interesting things along the road and showcase the occasional billboard tailored to an individual's needs and previous purchases. How many would turn that down? And after sometime of that model working, I'd say the brick & mortar Google would even be willing to take you to the lot and pay for the vehicle, guaranteeing it would always work perfectly on those roads to the mall. All subsidized of course by your friendly neighbourhood Spidermen, umm, I mean Mad Men.

Disclosure: Author owns GOOG, AAPL

06 July, 2009

EMC ups the ante on Data Domain in Technology Bidding War

EMC Corporation (EMC), not exactly a household technology name, but one that business knows all too well as the company is involved in various lines of business supporting technology infrastructure and storage all around the world. The company has turned itself into a healthy income generator providing solutions for businesses in the areas of Information Storage, Information Management and Security.

Most notably for EMC of late has been its attempt to expand its reach over the IT crowd, including, but certainly not limiting to simply protecting its position against the blue-chip Tech giants of today. It spun off a piece of popular virtualization company VMWare (VMW) into an IPO two years ago and now for its latest move has set it sights on winning a bidding war for specialized storage company Data Domain (DDUP). On the other end of the table is NetApp (NTAP), a firm very much in the same corporate storage business that EMC wants to dominate.

With Data Domain initially accepting an offer from NetApp for $1.9Billion, EMC countered with something similar offering $30/share in late May, which now has been bumped to $33.50/share. An enterprise value of $2.1Billion, which is calculated by the $2.4Billion offer price, minus nearly $300Million of Data Domain cash. Traders think the last has yet to be seen in this back and forth, as shares of DDUP continue to climb being pushed to $34 in today's market.

Data Domain the takeover play? Certainly, with both companies having gone back and forth already, it'll be interesting to see how much value NetApp has put on the company. Will there be another bid, or as analysts seem to think, is this it and has EMC sealed the deal?

Lots of questions, but if the traders, and not the analysts, are to be believed this one isn't over. With major markets settling down after an astounding bump from the lows in March, this acquisition story is an opportunity in the tech sector, and one that investors should watch closely. I believe NetApp will think long and hard about it, and if there's another move from the other side, EMC will move in for $37 and cement its grip on the world of specialty corporate storage.

Winning the bid for Data Domain solidifies an already strong corporate technology business for EMC, and with virtualization wildly seen as the now and the future of cost savings in Information Technology, EMC is in the drivers seat of a major stock ramp up at the first concrete signs of economic normalcy. In the $12-$13 range its still the underrated, and the unsung hero of technology names to own.

Disclosure: Author holds no position in any company mentioned.