Last week Microsoft reported its first year over year decline in revenues...ever. Although the performance could be blamed on the worldwide recession, many of its peers and competitors have reported both growth in revenue and earnings despite the recession. A decade of being second or third best (or worse) in many new innovations may finally be catching up to MSFT.
For the past decade, Microsoft has attempted to use its massive cash reserves to exploit the value of technical innovation. However, it has demonstrated a curious knack for being slow to the punch, or picking the wrong horse, as new concepts have captured the imagination of the market. The company has been responding to the market instead of leading the market, often finding itself to be a distant counterpoint to the dominant player - which costs money. Here are some examples:
- iPod -> Zune
- YouTube -> Soapbox
- Google -> MSFT Live
And in areas of strength, MSFT is beginning to lose ground:
- XBOX Live -> Wii
- Internet Explorer -> Mozilla Firefox
To management's credit, it keeps trying. The launch of Bing in June has elicited some rare positive reviews for MSFT from the tech press. After initial the curiosity associated with this direct threat to Google Search wore off, so did traffic. Microsoft shareholders are hopeful that Bing evolves more like Internet Explorer, and less like Zune.
Among MSFT fans, there remains a of lot of hope for Windows 7, which is expected to be launched later this year. Even there, danger lurks as GOOG has begun to make waves about its new Chrome OS.
Sramana Mitra offers nice synopsis of Microsoft's current situation.
This may seem like a bizarre comparison, however MSFT finds itself in the same position as GM in the late 1970s and IBM in the mid 1990s. MSFT is a long-time dominant company that is on a path towards the mushy middle. As a whole it is colossal, but in the many trenches in which it battles, it rarely dominates. Like many before it, Microsoft may need to re-assess its strengths and re-invent itself after a little creative destruction.
Looking back, GM never seized the opportunity, and ended up (albeit a few decades later) a shell of its former self. On the other hand, IBM, which struggled against the onslaught DELL, HP, Compaq, ORCL, MSFT, and countless others in the 1990s has worked hard to get out of the hardware business and turn itself into arguably the most dominant technology services company in the world.
Regardless of the pundit bashings that it has received over the past few years, MSFT is a legendary American company. It has created real wealth for a great many people. Management can choose to ignore the repeating patterns of history and fade towards a punchline a la GM, or it can choose (like IBM did in the 1990s) to redefine and refocus to remain relevant and vital 10 years from now.
7/23/09
Worldwide Connectivity Statistics.
Some interesting numbers for technology investors interested in companies that participate in the connectivity ecosystem. Worldwide recession notwithstanding, there are some areas of significant growth which should bode well for companies in several sectors. The NASDAQ has outperformed the Dow index significantly this year, and some of the statistics below may reveal some of the reasons why. During earnings season AAPL, IBM, NOK, INTC, GOOG all beat consensus estimates and all but GOOG (which does not provide guidance) have indicated positive outlooks entering H2 2009. In fact, IBM has increased its guidance for the last half of the year. Investors should expect positive outlooks for both CSCO and RIMM when they report next, although positive outlook may have been priced into these stocks.
Notwithstanding a pause in growth in some areas during H2 2008 and H1 2009, the global march towards greater connectivity continues.
Internet Usage:
Total worldwide: 1.5 billion or 23.6% of total world population.
Most users: China with 288 million or 22.4% of population.
Regions with greatest penetration: N.A. 62.7%, EU 60.7%
For China to obtain similar levels of connectivity as North America or the European Union, another 500 million or so Chinese users would need to come online over the coming years, requiring massive investments in base infrastructure.
Emerging economies continue to drive internet connectivity growth, but are more likely to leverage fixed wireless broadband infrastructure to compensate for under-built wireline infrastructure. Even still, BRIC countries are likely to represent the vast majority of backbone investment as mega-operators in countries such as China and India continue to lay down the fundamental capacities to support growth in internet traffic.
Mobile subscriptions:
Total worldwide: 4.1 billion
Fastest growing regions: Middle East 32% CAGR and Africa 24% CAGR over past 5 years.
Basic mobile subscriptions in emerging economic regions are being used as a means by people to get access to basic services including banking. EEFT and First Data, among others, are likely to be vendors providing access to low-cost financial services options.
Mobile data services:
Total worldwide: 225 million
2009 growth rate: 93%
The most compelling growth rates that exist, even in the depths of a major recession, continue to be related to the mobile data services channel. Hence, investors continue to see better than expected results from companies associated with this niche. As stated many times in previous posts, the scale and complexity of the emerging infrastructure should benefit technology companies that supply solutions to this niche. Eventually, all current mobile subscribers worldwide are likely to adopt mobile data services at some point. The current penetration of data services into the mobile subscriber market is still very modest at 5.4%.
As the world continues to become more connected, capacity, capability, energy consumption and security should remain key issues. Worldwide, there should be more investment and innovation in these areas.
The top basket of Canadian stocks to think about in the connectivity ecosystem include: RIM, CGI, BWC, DWI, RCM, WIN, RKN, and TUN. Most of these companies have demonstrated excellent recent earnings performance, sustained and sometime expanding gross margins, with solid balance sheets and low debt ratios. These could represent a pretty good "connectivity" portfolio. Others to possibly consider include ABS, SVC, PIX, Q, and AXX.
I have probably overlooked a few key favorite stocks, feel free to add.
Disclosure: I own CSCO and BWC. I do not own any of the other stocks mentioned.
Notwithstanding a pause in growth in some areas during H2 2008 and H1 2009, the global march towards greater connectivity continues.
Internet Usage:
Total worldwide: 1.5 billion or 23.6% of total world population.
Most users: China with 288 million or 22.4% of population.
Regions with greatest penetration: N.A. 62.7%, EU 60.7%
For China to obtain similar levels of connectivity as North America or the European Union, another 500 million or so Chinese users would need to come online over the coming years, requiring massive investments in base infrastructure.
Emerging economies continue to drive internet connectivity growth, but are more likely to leverage fixed wireless broadband infrastructure to compensate for under-built wireline infrastructure. Even still, BRIC countries are likely to represent the vast majority of backbone investment as mega-operators in countries such as China and India continue to lay down the fundamental capacities to support growth in internet traffic.
Mobile subscriptions:
Total worldwide: 4.1 billion
Fastest growing regions: Middle East 32% CAGR and Africa 24% CAGR over past 5 years.
Basic mobile subscriptions in emerging economic regions are being used as a means by people to get access to basic services including banking. EEFT and First Data, among others, are likely to be vendors providing access to low-cost financial services options.
Mobile data services:
Total worldwide: 225 million
2009 growth rate: 93%
The most compelling growth rates that exist, even in the depths of a major recession, continue to be related to the mobile data services channel. Hence, investors continue to see better than expected results from companies associated with this niche. As stated many times in previous posts, the scale and complexity of the emerging infrastructure should benefit technology companies that supply solutions to this niche. Eventually, all current mobile subscribers worldwide are likely to adopt mobile data services at some point. The current penetration of data services into the mobile subscriber market is still very modest at 5.4%.
As the world continues to become more connected, capacity, capability, energy consumption and security should remain key issues. Worldwide, there should be more investment and innovation in these areas.
The top basket of Canadian stocks to think about in the connectivity ecosystem include: RIM, CGI, BWC, DWI, RCM, WIN, RKN, and TUN. Most of these companies have demonstrated excellent recent earnings performance, sustained and sometime expanding gross margins, with solid balance sheets and low debt ratios. These could represent a pretty good "connectivity" portfolio. Others to possibly consider include ABS, SVC, PIX, Q, and AXX.
I have probably overlooked a few key favorite stocks, feel free to add.
Disclosure: I own CSCO and BWC. I do not own any of the other stocks mentioned.
7/17/09
Trading Idea: GOOG performance foreshadows CX performance?
For 5 of the past 6 quarters, whenever GOOG beatforecasts, so did CX. The common thread between Google and Cyberplex is that they both deliver to marketing managers measureability and performance-based ad budgets.
It is well published that GOOG beat analyst estimates for both sales and earnings for the third quarter in a row. As stated in earlier posts, there are three trends that continue to propel better than expected performance at Google:
There are two downside risks to CX results:
There is more potential forecasting risk with CX, but as a performance-based online ad network, it has similar DNA to Google. For the 5 of the past 6 quarters a GOOG BEAT has foreshadowed a CX beat two weeks later. The only quarter where this did not happen, GOOG missed and CX beat (Q3 2008).
Since CX raised capital in May, the share price has trended sideways on light volume and it is now trading below its 50-day moving average, so good performance for Q2 may result in a potential move up. Google moved up well ahead of its 50 day moving average for two weeks ahead of its Q2 report as investors anticipated results to beat expectations. The stock price is declining on the news. With GOOG as a foreshadow, could CX show a similar pattern?
It is well published that GOOG beat analyst estimates for both sales and earnings for the third quarter in a row. As stated in earlier posts, there are three trends that continue to propel better than expected performance at Google:
- Marketing and advertising budgets are being focused on performance. Cost per Click (CPC) advertising is considered to be one of the most performance-oriented advertising approaches around. It is Google's strength, the source of its dominance, and as more marketers shift budgets, the driver of better-than-expected performance. Paid click- through increased 15% YoY while most other media (including online display advertising) declined.
- Unemployment. People being laid off are spending more time online to network, research, find jobs, or create new businesses. Comments by the CEO of domain vendor Tucows (TCS:TSX) last quarter suggested that domains are being bought at record levels as laid off people start-up their own businesses or blogs.
- Brand Dominance. Most people are finding their way around with Google. The introduction of Bing in June has had little impact on Google. Traffic to Google search in June increased by 12%, while pageviews increased by 31%. The remainder of the sector enjoyed a 2% increase in traffic, and a 1% increase in pageviews. IT managers don't get fired for selecting IBM; Marketing Managers don't get fired for selecting Google.
CX is one of the vendors at the forefront of an even more measureable performance-based online advertising method called Cost-per-Action (CPA). Essentially, marketers only pay Cyberplex if a user actually does something after they click on an ad. It could be a survey fill, a poll, or even a purchase. It has piqued the interest of mainstream advertisers who are beginning to deploy significant prgrams with CX.
Similar to Google, Q2 results for CX may show a sequential decline from Q1 due to seasonality, although the decline may be less than analysts expect. Notwithstanding, the quarter should show significant annual quarterly growth in sales and earnings over Q2 2008.There are two downside risks to CX results:
- The company has category concentration in the Health & Beauty sector. Weakness in this sector could create downside risk. A segment proxy to this performance may be Shoppers Drug Mart (SC.TO). SC reported strong earnings for Q1 2009.
- Users stop engaging. If more people click on CX ads, but do not take action, performance could be impeded. This would show up as worse than expected sales and more than expected declines in gross margin.
- With its recent capital raise, the Company has been in a position to accelerate the development of its affiliate network during Q2, creating more revenue opportunity, and a broader footprint that attracts larger advertisers.
- Unemployed people are putting emphasis on improving fitness and overall health. This trend could benefit the health and beauty category, which is where CX has concentration.
There is more potential forecasting risk with CX, but as a performance-based online ad network, it has similar DNA to Google. For the 5 of the past 6 quarters a GOOG BEAT has foreshadowed a CX beat two weeks later. The only quarter where this did not happen, GOOG missed and CX beat (Q3 2008).
Since CX raised capital in May, the share price has trended sideways on light volume and it is now trading below its 50-day moving average, so good performance for Q2 may result in a potential move up. Google moved up well ahead of its 50 day moving average for two weeks ahead of its Q2 report as investors anticipated results to beat expectations. The stock price is declining on the news. With GOOG as a foreshadow, could CX show a similar pattern?
Disclosure: I own CX.TO. I do not own GOOG or SC.TO
7/16/09
Hailing taxis from the sky: Guestlogix (GXI.V) announcement.
A new press release from GXI announces the launch of ground services delivered through it onboard retail platform.
This could be the "killer app" for the GXI retail platform because it is a natural extension of the travel experience, and there is clear value add to passengers. As most business travellers know, there is nothing worse than trying to figure out how to get from the airport to the first meeting after a five hour flight. Destination ground connections are an easier sale by flight attendents who perceive them as a way to improve the travel experience of "their" passengers. If executed well, uptake should be strong.
The company has been building multiple partnerships with ground service vendors and claims to be able to deliver to 50 of the top airports in the world, which is clearly a good start.
This announcement should be considered more evidence of execution, which should satisfy the horde of analysts that cover this stock. As a result, estimates and targets are likely to be maintained.
The biggest catalyst for the stock continues to be how quickly it can deploy its backlog in comparison to analyst expectations, and how effectively it can dominate the segment by signing up more carriers and merchandisers over the next few quarters.
This could be the "killer app" for the GXI retail platform because it is a natural extension of the travel experience, and there is clear value add to passengers. As most business travellers know, there is nothing worse than trying to figure out how to get from the airport to the first meeting after a five hour flight. Destination ground connections are an easier sale by flight attendents who perceive them as a way to improve the travel experience of "their" passengers. If executed well, uptake should be strong.
The company has been building multiple partnerships with ground service vendors and claims to be able to deliver to 50 of the top airports in the world, which is clearly a good start.
This announcement should be considered more evidence of execution, which should satisfy the horde of analysts that cover this stock. As a result, estimates and targets are likely to be maintained.
The biggest catalyst for the stock continues to be how quickly it can deploy its backlog in comparison to analyst expectations, and how effectively it can dominate the segment by signing up more carriers and merchandisers over the next few quarters.
7/14/09
US Employment Analysis: Supports Short-term Volatility
This is a sobering analysis of current U.S. employment metrics. As per the earlier post today, investors should not gain any solid conviction from these charts as to whether the worst is over, or if there is more pain and agony still to come for the American economy. Almost every positive chart is offset by a negative one, and vice versa. This helps support the potential for more short-term volatility. Crossroads.
Right now feels like that few seconds of silent suspense before something really big happens. And no one knows which way it's going to go. Whichever way it goes, the charts seem to indicate that the downside looks steep and fast, and the upside looks slow. The U.S. Treasury is likely looking at more precise data, and it does not want to risk the potentially harrowing downside. This may be why it has hinted that it is willing to step in to provide even more stimulus later this year if it needs to, despite all of the green shoots sprouting up.
The outlook from Q2 may help. INTC reported a BEAT with nice growth in sales and, more importantly, a margin surprise. It has maintained it full-year outlook, which should be considered a neutral indicator.
Let's all sing:
Should I stay or should I go, now
If I stay there will be trouble
If I go it will be double
C'mon and let me know
Should I cool it or should I blow...
Disclosure: I do not own INTC shares.
RIP Joe Strummer.
Right now feels like that few seconds of silent suspense before something really big happens. And no one knows which way it's going to go. Whichever way it goes, the charts seem to indicate that the downside looks steep and fast, and the upside looks slow. The U.S. Treasury is likely looking at more precise data, and it does not want to risk the potentially harrowing downside. This may be why it has hinted that it is willing to step in to provide even more stimulus later this year if it needs to, despite all of the green shoots sprouting up.
The outlook from Q2 may help. INTC reported a BEAT with nice growth in sales and, more importantly, a margin surprise. It has maintained it full-year outlook, which should be considered a neutral indicator.
Let's all sing:
Should I stay or should I go, now
If I stay there will be trouble
If I go it will be double
C'mon and let me know
Should I cool it or should I blow...
Disclosure: I do not own INTC shares.
RIP Joe Strummer.
Q2 2009 Earnings Season: Crossroads
As Q2 earnings season begins, the market appears to be at a crossroads. A lot of portfolio managers are humming along to the old Clash refrain "Should I Stay or Should I Go Now?" Interestingly, the song has a different meaning depending on how much cash is in the mix.
Based on a sampling of portfolio managers, it appears as though most funds are still weighted towards cash. Recent declines in the market suggest that many who dipped into the market since March have taken profits from the recent run up, and have shored up cash positions again leading into the 4th quarter.
Since the market bottom in March, and leading into the month of July, the VIX had been on a steading decline and was flirting with an 8-month low. During the most recent correction, volatility has increased as uncertainty begins to creep back into the market.
Investors appear to be uncertain because there are a lot of offsetting data and opinion in the market as reporting season begins. Here are some examples:
In the Tech Sector, there was a pretty strong move from the lows of March. In discussions with my friend Adam Adamou from Caseridge Capital it appears that, exiting June, the market had been priced to imply a 12% to 15% increase in gross margins over the coming year. For the previous year, the actual decline of GM was 15%, and for the March 2009 quarter, GM growth was measured at 0.5%. The market was pricing a snap-back recovery that is a lot to expect from any sector considering the level of economic uncertainty. The recent correction brings more credibility to future expectations.
The uncertainty regarding Q2 earnings appears to be setting up for a volatile few weeks of trading, but not a lot of movement until the end of the summer when nicely tanned portfolio managers begin to redeploy cash.
When they return to the markets, Portfolio Managers are likely to find healthcare, technology, and consumer staples stocks with lots of cash and low debt ratios to be attractive. The long-term prospect of the financial sector is a little more uncertain as new regulations impede future earnings potential. Although Canadian banks may look a lot better than their American counterparts. Commodities are likely to rebound as the market begins to drool again for 2010 BRIC demand.
With respect to small cap tech stories in Canada; I am still sticking with CX, BWC, DSG, and RKN as favorites. All continue to show growth, margin leverage, with low debt and a lot of cash in the till. More interestingly, each probably have future catalysts which should benefit shareholders. As for the US tech sector, AMZN and CSCO still look good.
Disclosure: I own CX, BWC, DSG, CSCO shares. I do not own RKN, GOOG, GS, JPM, NOK, AMZN, or DELL
Based on a sampling of portfolio managers, it appears as though most funds are still weighted towards cash. Recent declines in the market suggest that many who dipped into the market since March have taken profits from the recent run up, and have shored up cash positions again leading into the 4th quarter.
Since the market bottom in March, and leading into the month of July, the VIX had been on a steading decline and was flirting with an 8-month low. During the most recent correction, volatility has increased as uncertainty begins to creep back into the market.
Investors appear to be uncertain because there are a lot of offsetting data and opinion in the market as reporting season begins. Here are some examples:
- Good quarters are expected from belweathers such as Google (GOOG), Nokia (NOK), Goldman Sachs (GS), and JP Morgan (JPM). Offsetting these data points, Q2 performance in many sectors could be weaker than expected as analysts overshoot the "green shoots". This could be especially true in the commodities and materials sectors as hedging in some commodities like oil distorted pricing. In general, investors may see more surprise earnings "misses" than surprise "beats" in many sectors (including technology) for Q2 with greater than anticipated pressure on margins. See Dell (DELL) and Matrikon (MTK) as prime examples. YoY declines in performance in the commodity sector should be significant as Q2 2008 was positively impacted by a commodities bubble.
- Positive analyst statements regarding the financial sector, positive resale housing data in Canada, better than expected job loss performance, and improving CEO sentiment point to positive economic conditions leading into the 4th quarter, and into FY2010. Offsetting this positive sentiment, unemployment is still increasing, and there are whispers that the U.S Administration may need to apply more stimulus to the U.S economy, implying that the "green shoots" are tenuous and in danger of shriveling, and that the positive sentiment may not yet reflect reality.
- The positive impact of government stimulus programs should begin to show up in construction, materials, commodities, and technology sectors during Q4. However, these positive benefits are likely to be offset by the impact of new regulations related to commodity speculation planned by the U.S. Government, and the potential for passive trade protectionism.
In the Tech Sector, there was a pretty strong move from the lows of March. In discussions with my friend Adam Adamou from Caseridge Capital it appears that, exiting June, the market had been priced to imply a 12% to 15% increase in gross margins over the coming year. For the previous year, the actual decline of GM was 15%, and for the March 2009 quarter, GM growth was measured at 0.5%. The market was pricing a snap-back recovery that is a lot to expect from any sector considering the level of economic uncertainty. The recent correction brings more credibility to future expectations.
The uncertainty regarding Q2 earnings appears to be setting up for a volatile few weeks of trading, but not a lot of movement until the end of the summer when nicely tanned portfolio managers begin to redeploy cash.
When they return to the markets, Portfolio Managers are likely to find healthcare, technology, and consumer staples stocks with lots of cash and low debt ratios to be attractive. The long-term prospect of the financial sector is a little more uncertain as new regulations impede future earnings potential. Although Canadian banks may look a lot better than their American counterparts. Commodities are likely to rebound as the market begins to drool again for 2010 BRIC demand.
With respect to small cap tech stories in Canada; I am still sticking with CX, BWC, DSG, and RKN as favorites. All continue to show growth, margin leverage, with low debt and a lot of cash in the till. More interestingly, each probably have future catalysts which should benefit shareholders. As for the US tech sector, AMZN and CSCO still look good.
Disclosure: I own CX, BWC, DSG, CSCO shares. I do not own RKN, GOOG, GS, JPM, NOK, AMZN, or DELL
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