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.
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
Google’s (GOOG) gravity defying numbers shattered the models of no less than ten major Wall St. Analyst firms causing them to raise price targets. The lowest of these recent ratings implies a 10.5% upside based on Friday’s closing price and the highest estimate would provide a 27.3% gain.
Stifel Nicolaus raised target to $650
Barclays (BCS) raised target to $620
FBR raised target to $680
Piper Jaffray (PJC) raised target to $623
Kaufman Bros. raised target to $645
UBS raised target to $635
JP Morgan & Chase (JPM) raised target to $608
Goldman Sachs (GS) raised target to $635
BofA (BAC) raised target to $640
Citi (C) raised target to $640
Benchmark raised target to $625
Canaccord Adams raised target to $700 (Street High)
Disclosure: Long GOOG