Palm Inc. reported earnings after the close today, and what they reported wasn’t pretty. Expectations were for a loss of $.42 per share on revenue of $316.19 mm. Reported numbers were $366 mm, which was actually higher than expectation, and a loss of $.61 per share, which was not. After being up by about 5% during the day on a lot of short covering, the stock tumbled on the news in after hours by over 13%.
Adding to the woes are increasing inventories at the carriers. This is an issue because Palm records sales when the products are shipped to the carriers, not when they are actually sold to consumers. Thus, large stocks of unsold inventory will prevent Palm from recording much in the way of sales until that backlog is cleared. Thus, Palm issued revenue guidance for the upcoming quarter that is half of the $305.77 mm that analysts were expecting.
My Palm article in September hypothesized that the stock (then at 17.40) would drop as consumer adoption of the new operating system would lag. Back then, Palm was shipping over 800,000 units per quarter, that number has since increased to over 900,000 but sell through to customers has decreased to 400,000 units. The stock in after hours dropped to below $5 as the long term survivability of Palm remains in doubt while they try to compete against the mighty Apple, Google and RIMM.
Disclosure: Long GOOG, no position in any other stock mentioned
MarketWatch is reporting that Google will be testing a new direct-to-home fiber-optic internet connection service that will reach speeds of up to 1 gigabit per second. The company is currently looking for interested communities, and hopes to test their new system with up to 500,000 people.
This service has the potential to be a game changer. Google is interested in much faster internet connections because of their belief in “cloud-computing,” where very little information is stored on a user’s local machine because the actual computing is done by a remote server. They have pushed this technology into the mainstream with services like Docs, Picasa photo editing, Calendar, and hope to take the technology further with the Chrome OS.
The current issue concerns the speed of the user’s connection to these services. Even with the fastest available connection speeds, which in my area is 50 mbps, these services are not as fast as a desktop client due to latency. Picasa only offers minimal photo editing due to bandwidth limitations, and video manipulation is impossible. Thus, desktop programs like Photoshop, Office, iPhoto and iMovie are still necessarily stored on a local machine.
Google knows that companies like Apple (AAPL), Microsoft (MSFT) and Adobe (ADBE) are too entrenched on the desktops of consumers, so they are not trying to fight the battle there. Instead they are staying on the relatively uninhabited world of web-based applications. And they are winning, chiefly because they are a high-profile company and that no one else does free, ad-supported products quite as well as Google.
If this service from Google becomes widely available, and at a reasonable cost (admittedly a big ask), it would destroy the business models of many companies. Software providers like Apple, Microsoft and Adobe would find themselves competing against a free, cloud-based product that acts in the same way that their desktop software does but available anywhere. Content providers like Time Warner (TWX), Sony (SNE), Viacom (VIA), CBS (CBS) etc be selling their media via streaming services, as people move their entertainment libraries off their shelves and hard drives and onto remote servers. And current internet providers like Comcast (CMCSA), AT&T (T) and Verizon (VZ) will be competing against a service which runs at 10x their current maximum bandwidth. That is why this could very well be a game changing moment for Google.
Disclosure: Long GOOG, MSFT, T and the market in general. No positions in any other stocks mentioned.
During the year Michael and I issue various opinions about stocks that we feel strongly about. We do this whether we have purchased/sold them in our personal accounts, or just because we feel strongly about the direction a stock will take but aren’t in a position to capitalize. We have been writing this blog for a several months now and feel it would be instructive to analyze our picks and determine what worked and what didn’t, and provide our current insight on those stocks. Current market prices will be taken from the close of market today, January 7th, 2010.
Some That Went Well:
B SHAW @ 28.20: I bought the Shaw Group (SHAW) on October 16, a day where they got hit hard by a number of events. Shaw just announced earnings which beat expectations, taking their stock to $32.36, for a return of about 16% in 3 months. I saw them then, just as I do now, as an undervalued and under-appreciated infrastructure play with a nuclear energy kicker.
B BNI @ 79.20: I bought Burlington Northern Santa Fe (BNI) on October 1. I was looking at a cyclical play as the economy recovered, I figured that rail was going to see a huge rebound as the economy recovered. What would be the chief driver of this? The efficiency of rail, as energy prices rise (another bet I am taking), rail will become more and more attractive relative to other methods of over-land material shipping. Towards the end of last year, Warren Buffet announced that he was buying the rest of the BNI shares he didn’t already own for $100/share, and the stock rose to that level generating a return of 26% in 2 months. I eventually sold that position instead of receiving the equivalent in BRK.B shares.
S PALM @ 17.40: I nailed this one. I didn’t own the stock, so I couldn’t sell it, but had investors heeded my warning they would have saved themselves from 34% of downside given the current price of $11.45. I wrote this as PALM was riding high on the prospects for the Pre smartphone, but I saw the dark clouds on the horizons. With Google releasing their Nexis One yesterday, if puts another nail in the coffin of Palm’s WebOS, as the ability for manufacturers to customize Android, and the immense Apple App store, give massive advantages over Palm’s new system.
S GRMN @ 37.63: This is another one that I didn’t own and so couldn’t sell, but the stock is now 17% below the price at which I recommended selling. Again, this is smartphone related as GRMN released their Nuvi to much hype, but little substance. GRMN is losing marketshare to smartphone applications like on the iPhone, Motorola Droid and Google Nexis One, and this is a trend that will continue. The Nuvi was supposed to help, but it was a confused hybrid between stand-alone GPS and a smartphone that made a mess of both functions. Investors will do well to continue to stay clear.
B RIMM @ 56.60: Mike nailed this price for RIMM. He used discounted cash flows analysis to determine that it was severely undervalued, and that turned out to be the case. RIMM is currently trading at approximately $65, for an upside of about 16% in the 2 months since his article was published. RIMM is the biggest player in the smartphone market, and their strength will likely continue as they release new products that are competitive with the other market leaders.
S RIMM @ 83.60: Again, Mike nailed this one. With a current price of $65, Mike saved himself and any readers who heeded his warning from 28% of downside over the course of 3 months. His hypothesis was that expectations for performance had outstripped actual results, and that was the case as RIMM reported earnings that disappointed.
There was also Mike’s December 17th post, on Meredith Whitney’s calls on Goldman Sachs & Co. (GS), Morgan Stanley (MS), and JP Morgan Chase & Co. (JPM) where he proposed that it would likely be profitable to ignore her calling considering that the stocks had already fallen quite a bit and that even with her lower earnings estimates, they still represented great values at their prices at the time. Mike has so far been proved correct, and all three are up by 10%, 13% and 11% respectively in the two weeks since his post. All returns are more than doubling the 4% gain of the S&P 500.
And Some That Did Not Go So Well:
B VXX @ 48.30: The problem was not the argument, but the vehicle chosen to execute that argument. VXX is an ETF that is designed to follow the short-term VIX futures contract price. The problem is, it doesn’t. Since my article was posted, this ETF is down 37%. Luckily I got out pretty quickly (at $45.96), but in retrospect this was a horrible idea.
S AAPL @ 189.59-190.00: Our hypothesis on this article (which incidentally got us a note from Apple’s lawyers…check out the original post) was that AAPL had fully priced in any future good news, and was excluding the possibility of poor performance. A week after our original article, Apple released record earnings, and the stock shot up to above $200. It has shown volatility since then, but now stands at $210 for a missed upside of about 10%. We stand by our convictions, but with the utmost respect for AAPL’s continued performance.
B RIMM @ 70.07 and 67.20: After RIMM missed earnings on September 25, the stock dropped by 15% in a day. I bought that dip, and Mike bought a few days later. I underestimated the investor disappointment concerning earnings, and bought way too early. The fallout from earnings hadn’t happened yet, and the stock would eventually settle in the mid $50s before recovering. At its current price of $65, the decline isn’t so painful but it definitely hurt for a while.
B BAGL @ 10.12: Mike found this one while searching through relatively unwatched industries for low-beta stocks that were severely undervalued on a cash flow basis to their peers. It is currently down only 4% but this is following a more than 11% gain off of where it fell in the mid-8’s. Einstein Noah Restaurant Group continues to trade at less than half a years revenue even though the company is still growing. Mike still feels it offers a very compelling value especially compared to it’s peers, however, he recognizes that it was probably a mistake to dive in until there was a potential catalyst to drive the stock higher considering that they don’t even pay a dividend.
I hope readers find this constructive. I find it is helpful to go back and learn from both your mistakes and successes. In general, I feel that we have done quite well in picking stocks on both sides of the trade.
Disclosure: Andrew is long RIMM and SHAW. Michael is long BAGL, BAC and net long the market although currently building a position in SH.
Amazon’s (AMZN) stock reached a new, all-time high of 135.91 today after having another successful day, finishing up over 3% on a choppy day of trading. What is going on, and why does it deserve a Price-To-Earnings Multiple of close to 80?
Certainly, we can look at the obvious trends that have been taking place over the past decade or so. The slow (or not so slow) decline of brick-and-mortar is well documented, as is the amazing, almost parabolic, rise of online e-commerce. The large overhead and real estate costs of running a physical store put shops like Macy’s (M), Target (TGT) and Borders (BGP) at a disadvantage when it comes to pricing. Add to that the advantage that customers in most states do not pay sales tax for online purchases (although this may change), and the advantages of Internet shopping are huge.
But, based on this years earning expectations of 1.88, AMZN is trading at a multiple of 72 as of todays close. Granted, this is lower than was found during the bubble years but they have real revenue now and far lower growth prospects. Analysts expect the company to grow by 25% per year, which in the next 5 years would give AMZN a market cap of about $180bn, equivalent to Apple (AAPL), Google (GOOG), or Proctor & Gamble (PG) today.
I could not think more highly of Amazon the company. They have proven resiliant, resourceful and innovative in their highly competitive market. They refuse to rest on their successes, as shown by their unveiling of the Kindle; a product that is making people take E-Readers seriously for the first time. And I believe that the company will show continued success. AMZN the stock, however, has gone too far. There are less pricey ways to play the shift to E-Commerce (Fedex (FDX) and UPS (UPS) spring to mind), but frankly, this whole e-shopping trade is getting too crowded for my blood.
Disclosure: Long TGT, no positions in any other stock mentioned.
Pretty simple rules based buy. Research in Motion (RIMM) should be trading above $60 using the most extraordinarily conservative projections according to discounted cash flows. It should trade around $80-90 using more realistic projections and around $110 using bullish scenarios.
$56.60 was also about 15% under my average price which usually calls for me to add more to my positions if I still feel good about them. I know there is lots of concern that Apple’s (AAPL) iPhone and the new Android competitors from Google (GOOG) such as the Motorola (MOT) Droid will hurt Research in Motion and to be honest I agree. However, I think that the concern has been overdone. Research in Motion is strongest in the business sector where the iPhone and other smart phones have irtually no traction. Corporate spending is falling now because of the recession but I would prefer to buy this fear rather than sell on it because it is temporary and only related to the recession.
The trend in mobile smart phones is strong and I believe Research in Motion will continue to capitalize on its growth.
Disclosure: Long RIMM and GOOG