Consensus earnings growth does not justify share price for AAPL, AMZN, NOK, VMW, or CRM

 We have been seeing a lot of price justification related to AAPL’s recent climb to near the $300 level. Arguments abound that despite trading at a P/E multiple of 25.3x, AAPL is cheap on a fundamental basis due on its growth trajectory and its cash position. Based on comparative multiples, this may be a flawed argument. A classic method to test whether the market is pricing appropriately for future growth is to calculate the PEG ratio (price-to-earnings-growth). If a stock had a PEG ratio of 1.0x, investors should consider future earnings growth to be fully priced into the stock, and that its growth trajectory is “fairly valued”. Below 1.0x, there is a gap between the stock price and future earnings, and there is a buying opportunity. A PEG ratio above 1.0x infers that the market is overpaying for earnings growth.

RES Free Thinking: 2009 Year In Review.

Overall, 2009 has been a fun ride for RES Free Thinking with the Top 5 Tech Picks returning 184.9% from the beginning of the year, and 156.9% since the market lows during the week of March 8, 2009.

CEO Series: Interview with Andrew Osis, CEO Multiplied Media - developers of the Poynt Mobile App

This is the first in a series of interviews conducted with CEOs of interesting Canadian technology companies. The intent of this project is to provide investors with a unique understanding of what various companies are doing - directly from the top dog. Hopefully, the interviews conducted over the next few weeks will help investors to gain insight into the fundamentals of the companies to which they may not otherwise have access.

The first interview conducted is with Andrew Osis, Chief Executive Officer, Multiplied Media (MMC.V). The company is headquartered in Calgary, Alberta and has developed the wildly successful and award-winning mobile search application for Blackberry called Poynt.

GOOG Beats Expectations...Will CX .TO Follow Again?

During the Q4 earnings season I began highlighting an interesting pattern between Google earnings performance and Cyberplex performance. Essentially, each time that Google exceeded earnings expectations, Cyberplex also exceeded forecasts when it reported approximately two to three weeks later. In July, I became a little bolder and proposed a trading idea that Google performance has consistently foreshadowed Cyberplex performance, suggesting that traders could accumulate ahead of CX.TO earnings report. 

CX Performance Preview: Could it beat consensus?

Cyberplex (CX.TO) reports Q2 earnings on August 6, 2009 after close of the market. In conjunction with the release, Cyberplex will host a conference call on Thursday, August 6, 2009 at 4:30 p.m. EST to discuss the financial results.

Call details:

Participant Dial-in Numbers:
U.S. Toll Free: 1-877-737-1669
Canadian Toll Free: 1-800-501-6064
International Toll: 302-709-8008
Verbal Passcode (to be given to the operator): VR63282

There is greater likelihood than not that Cyberplex could beat consensus forecasts.

During the Q1 conference call, management confirmed that there is inherent seasonality in performance. Typically, both Q2 and Q3 results decline sequentially from Q1, and then improve again for Q4. Most analysts are likely to reflect this seasonality in their forecasts for this reporting period, especially after Q1 results came in much stronger than consensus.

However, there is better than 50% probability that CX could exceed consensus analyst forecasts for the following reasons:

• Google foreshadows Cyberplex. Google results beat published analyst forecasts for Q2, showing some sequential growth in revenue and earnings. During the depths of the recession, marketing managers were increasingly seeking performance-based advertising in the form of Cost-per-Click programs (Google's primary revenue engine). Cost-per-action (CPA) based advertising is even more performance based than CPC, which could bode well for Cyberplex performance, especially as some mainstream accounts begin to take notice and sign on.

• Cash acceleration. At the two-third point of the quarter, the Company closed approximately $16 million in financing by way of a bought deal equity issue, increasing total working capital from $8.9 million ($4.7 million cash) to approximately $25 million ($21 million cash). This extra capital could have been deployed towards more aggressive affiliate marketing during the last weeks of the quarter, implying a late quarter bump in revenue performance.

Both of these datapoints suggest that there could be surprise upside to forecasted performance as the company continues to catch lightning in a bottle.

Are there downside risks? Yes.

• As earnings have surged for this company over the past three quarters, it has a clearly identified risk in category concentration. Essentially, its Health & Beauty line of business has represented over 50% of total performance. Without further diversification, a small decline in sales for this category would have a relatively larger negative impact on performance.

• The new capital could be a distraction to management. With a significant injection of cash comes more intense pressure on management to do something with it - such as making an acquisition. More time on acquisition strategies may imply less time spent on core business activities, which could negatively impact performance in the short-term.

Notwithstanding the identified risks, the generally positive market conditions for performanced-based online advertising (as reflected through Google results), and the recent injection of capital could point to better than forecasted performance by Cyberplex for the reporting period. With an improving economy and new capital, the outlook for Cyberplex is likely to also improve.

Disclosure: I own shares of CX, I do not own shares of GOOG

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.

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:

• 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.

There are two upside risks:

• 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.

Google had to pay more to its affiliate network last quarter, and it should be expected that CX would need to do the same, so gross margins should decline similarly for Q2.

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

Cyberplex Crushes It Out Of the Park

After markets closed today Cyberplex (CX.TO) reported Q4 and full-year results. In a good economy, the results would be considered outstanding. During this recession, the results could be considered astounding, especially considering that all of the reported growth was essentially organic. Sales for Q4 increased 429% to $28. 9 million from $5.5 million reported for the previous year Q4. Sequentially sales increased by 162% from $11.0 million reported for Q3 2008. When reported, Q3 2008 results were considered by analysts to be an excellent quarter.

The Company reported $4.9 million in Net Income, or $0.09 EPS for Q4, which represents a 17% NIM on sales. Gross Margin for the quarter was 34%, which has been inline with previous quarters, and EBITDA was reported at $5.0 million. Shareholders should be ecstatic with the margin leverage demonstrated during Q4 2008.

Earnings results from Q4 also represent a vast majority of full-year earnings. FY 2008 Net Income was reported at $5.7 million or $0.11 EPS, which represents a 10.7% NIM. Blended gross margins for the year were reported at 35% and EBITDA was $6.7 million or nearly $0.13 per fully diluted share. Total sales for the year were reported at $57.3 million from which Management was able to extract $19.8 million in Gross Margin.

The TTM EV/EBITDA multiple on this stock is 3.8X, at the low-end of a range of EV/EBITDA multiples among the Top 30 Canadian Small-Cap Tech Stocks.

The company has approximately $5.3 million in cash, although its balance sheet may spook more conservative investors because the net cash position is $1.8 million right now. The earnings performance from the past two quarters should hint at the free cashflow potential of the Cyberplex model in future quarters, which may put concerned investors at ease.

Cyberplex is at the top end of the online advertising spectrum in terms of measureability. Performance-based advertising by its nature shortens the discover-decide-do cycle so that marketing risk is reduced for advertisers. Marketers only pay for desired outcome. Cyberplex reduces perceived advertising risk for marketing managers, which tends to preserve careers during recessions. This is why Cyberplex is currently crushing it out of the ballpark.

During the conference call, a participant asked if the performance of this quarter is sustainable. On percentage growth basis, it is likely improbable for two reasons:

1. The 4th quarter calander year is usually the best performing quarter seasonally for the Internet-based economy. As a result, Q1 should show a seasonal decline.
2. The extent of offerings is still growing, so there may be product or category-related lumpiness in quarterly performance. As was the case for Q4, a particular segment (Health & Beauty) was really strong. Until the offerings and the client-base are broadened, there may be a few swings in quarterly performance due to the impact one or two items. Although the Q4 results are spectacular in the face of a recession, investors should look at the results for the full year. By the way, FY2008 results were excellent.

The FY2009 outlook for Cyberplex should be considered positive for the following reasons:

1. Measurable online advertising is expected to grow by approximately 17% during 2008 according to market research firms like IDC. Primarily this means Cost-per-Click advertising or paid search offered by Google (GOOG-Q). Cyberplex is at a level of measureability beyond CPC, so we may see Cyberplex grow at a faster rate than the category as a whole. Annualized growth in the mid-20% range for 2009 could be possible, and should be viewed by shareholders as positive.
2. Using significant insight gained from its analytic tools, CX can deliver excellent earnings efficiency from its campaigns. EBIT margins may increase as a result, regardless of quarterly revenue fluctuations. These efficiencies could offset the potential risk of gross margin pressure as competition intensifies and the recession lingers.
3. Earnout payments to IncentaClick should be completed by the end of Q1, which means that free cashflow should accelerate by H2 2009.
4. The Company has proven that there is potential for upside performance surprises as it scales its business, which may benefit shareholders during future quarters.

Cyberplex is a toughened tech bubble survivor whose stock value may be suffering from historical investor perceptions. Smart investors should get over it because this Company has re-invented itself into a cash machine that is growing. Not many companies can say that they are having historic quarterly performance during this recession. The stock should move tomorrow.

On second thought, this is the second tech company in the last two days that has reported historical Q4 performance during the recession. Maybe it's a trend.

A final interesting thought. For the past two quarters, strong performance by CX has been followed up by Google beating analyst expectations. If it happens three quarters in a row, is there trading information there?

I do not own shares of CX or GOOG.

Newspaper = buggy whip?

There has been a spate of recent announcement regarding the disappearance of traditional print newspapers and here is the latest from Hearst. The market is not surprised, and there is little sentimentality towards the demise of the industry.

According to the Newspaper Association of America, (NAA) print advertising revenue has been in decline since 2005. The category has been in free fall since the end of 2007 with Market Research reporting a 16.4% decline in revenues for 2008. Since peeking at $47.4B during 2005, US newspaper advertising expenditures have declined by 40.5% over a three year period to $28.4B. The outlook for 2009 may be even more bleak with JP Morgan predicting a 20% decline in advertising revenues to approximately $23.7B. This prediction infers a 50% decline in revenue for the industry in only 4 years. Put into historical perspective, the last time that the newspaper industry generated less than $24B in revenue was when Ronald Reagan was finishing his first term...1984.


The major media companies are obviously suffering. It was reported on March 9 that McClatchy (MNI) cut 1600 jobs as it struggles to service $2 billion of debt. Gannett (GCI), Hearst and New York Times Co (NYT) are also attempting to sell assets and shed jobs in order to cope with the cratering of the ad business. Some, like Tribune Co., have already declared bankruptcy.

Management at these operations have not been completely blindsided by the sudden emergence of the big bad Internet. Although there has been a lot of hang-wringing, spurious plans, ego-coddling, and various other forms of executional doddling, newspapers have been shifting focus onto the web for the past few years. However, this shift may have come too late to effectively compensate for eye-popping declines in print advertising sales. As late as 2007, online advertising still only represented 7.5% of total revenues according to the NAA, and the industry organization didn't even start calculating online revenue until 2003, a full decade after the commercialization of the Internet. Instead of viewing online publishing as a complimentary source of revenue streams, most newspapers initially viewed the Internet as a threat, or worse, a fad. This lack of initial recognition is the root of the damage being wrought on the industry now. This industry has missed so much opportunity to transform. Here is the laundry list of already missed billion dollar opportunities: search, RSS, ad networks, video, blogsphere, social networking, social broadcasting...uh...the point is made. To be fair to the much maligned buggy whip manufacturers, they only failed to recognize the threat/opportunity of one new innovation.

Just as newspaper publishers have begun to really press forward on the potential of monetizing the Internet, a significant recession has impaired the migration online. The only area of growth remaining appears to be paid search advertising, a category dominated by Google (GOOG). Online display advertising is expected to show a decline in revenues by up to 5% during H1 2009 before recovering. Newspapers were hiding, and now they have nowhere to hide.

They must forge ahead...but with what?

A really valuable data asset that newspapers retain via editorial systems is...context. One could even extend this value to historical narrative. Unlike social networks where history is a mere 3 years at best, and content portals where history is at most 10 years, newspapers have the potential ability to seemlessly link today's breaking events to literally millions of local and historical events, opinions, and commentary that are decades deep. Newspapers could be the gateway to context for online users, however they interact with information, or each other. And the technology is there. Nstein (EIN.V) has some advanced web content management solutions that can help newspapers create context on the fly. It has the ability to extract and index meaning from any article, advertisement, or caption. The system can then connect the meaning of multiple articles to deliver narrative and insight on-the-fly. This is pretty powerful stuff, and could represent some value-add that only a newspaper editorial system could deliver. Hearst became one of Nstein's biggest clients last year as it got serious about re-inventing itself.

In order to be relevant and make money, already leveraged media companies will need to find ways to continue to invest in the federation of proprietary data sources. Clearly, there is a lot of ongoing investment required in infrastructure, storage, middleware, and at the application layer. Besides Nstein, which is a micro-cap with limited liquidity, Open Text (OTC) should still be considered a good bet to benefit from the continued need for advanced content management solutions.

For newspapers, the geographic monopoly is long gone. the primacy of context, the "why" things happen has been deeply eroded. The print production and distribution techniques that were once barriers to empires are largely irrelevant. It took the leadership at once seemingly invincible newspaper empires a decade too long to recognize and then act upon the threats and opportunities posed by digital media. It may have been Mark Twain who said that history does not repeat itself, but it sure does rhyme. Newspaper = buggy whip.

Those media enterprises that are reacting now are investing as aggressively as possible into enabling technologies. Not all of the ideas will work, not all of the transforming media companies will succeed, however the technology companies that provide content management, storage, and data solutions should continue to benefit from this mad scramble for the next 4 to 6 quarters.

I do not own shares in any of the public companies referenced in this post.

The Mobile Advertising Industry...Nascient or Stillborn?

Every year around this time and for nearly a decade, a debate opens regarding the feasibility and awesome potential of mobile advertising, and the speculation continues this year unabated. I am "from Missouri" on this one.

Junior exchanges everywhere are littered with the tiny little corpses of mobile advertising start-ups that barely made it out of the incubators. Even the incubators and VCs that are spawning these nascient Googles are backing up with the sick, the dying, and the "redefining". Public entities lucky enough to have relatively strong balance sheets heading into the recession are re-inventing, or more likely, getting acquired as fast as Management teams can find a willing buyer.

There is no denying that the mobile screen is a platform for advertising with outstanding potential. It is an even better platform for integrated marketing. The question is, is there a viable new industry to emerge from this potential. For the most part, the answer is probably "no".

The Reuters article suggests that the business models are not well understood and that there is some "heavy lifting" remaining before there is a breakthrough...or is there?

The primary reason why the online advertising industry evolved into the relative giant that it is (some market analysts estimate it to be worth $70 billion to $80 billion now) is because it was a substitute for other media such as radio, print and television. More importantly, it operated within its own separate technical infrastructure (Internet Protocol). New players could emerge with new business models with protected technical property that incumbents failed to recognize initially. Ventures such as Google (GOOG-Q), Yahoo!(YHOO) and others had the protection of time to perfect business models and become major Companies. Others, whose shareholders often benefitted no less, were gobbled up by traditional media players such as News Corp, Disney, and Viacom once the high margin models showed promise and became a threat. Even still, independent online publishers and advertising networks remain sustainable, profitable small-cap and mid-tier operations.

So why isn't mobile advertising an even bigger opportunity? With ten times more mobile susbcriptions worldwide than Internet connections, the potential should dwarf the current online marketing industry. It may someday, but current entrenched publishers and ad networks are likely to reap most of the benefit. This leaves little room for new specialized entrants, and here is why:

1> The mobile screen is not a substitute for the internet connected screen, it is an extension. Even more so now with advances in small screen resolution and wireless network capacity, there is no discernable or sustainable gap in the technical infrastructure to allow for a specialist to have the benefit of time to emerge. An eyeball viewing a website on an iPhone is measured the same way as an eyeball viewing a website on a Dell laptop, or an HP desktop. To an advertiser, it does not matter. As a result, there is no long-term need for an arbitrar; which is what most of the failed Companies were positioned for. For a very short timeframe, there was a gap, but the window has closed, or is closing quickly.

2> There is no clear economic gap to be filled. Most business models and processes are already determined, and publishers and advertisers can simply extend their contracts to include mobile activity. Again, there appears to be little room for another layer of arbitrars that could add significant value to the ecosystem.

The mobile data channel offers significant upside to new ventures in payment systems, stored value, integrated marketing, content, and applications. There is massive amounts of potential and economic benefit to be gained. However, for now, unlike online advertising that preceded it, mobile advertising does not appear to be a big sector. In fact, it may not be a sector at all.

I do not own shares in any of the Companies mentioned in this post.

Web 1.0 Redux?

Recent positive earnings and outlooks from Amazon (AMZN-Q), Netflix (NFLX-Q), and Digital River (DRIV-Q) seems to have caught the market a little by surprise. Why has the old Web 1.0 e-commerce model experienced such a relative resurgence? And should investors buy, hold or sell in the sector?

The overall upward trend in online usage benefits from both demand-side and supply-side drivers. This alone should be seen as positive.

Demand Side
During the Holiday Season, it appears that consumers were less about shopping experience and more about buying utility. As well, higher unemployment and economic insecurity means fewer commuting trips and less destination travel, both of which typically generate more in-store shopping. Its a lot less fun trudging to the local Wal-Mart than it is to shop at Sak Fifth Avenue on the cancelled trip to New York. Furthermore, "deals" can be repeated online with less consumer hassle associated with parking and crowds.

As the economy worsens, we should see this trend strengthen because, well, it's happened before. In the early 1990s, Faith Popcorn rose to fame in part because she coined the term "cocooning", which described the trend of people staying at home more. In retrospect, this trend was due primarily to the recession, and once the economy returned to health, the niteclubs began to fill again. It's reasonable to suggest that 17 years later, people are likely to behave similarly. Netflix appears to be a clear beneficiary of this trend. During the early 1990s, the clear beneficiary was...Blockbuster (BBI-NYSE). Same trend, different delivery.

E-commerce is benefitting from maturity. In these uncertain times, e-commerce has been around for nearly 15 years, and most consumers have online buying experience. As well, the technology has greatly evolved to offer better perceived security, privacy and choice. Unlike in the past, there is consumer pull, which is far more cost effective.

Brand matters. Just like marketing budgets flow to Google (GOOG-Q), and IT services contracts flow to IBM (IBM-NYSE), e-commerce flows to "safe" dominant brands. This benefits Amazon directly. On the other hand, eBay (EBAY-Q) has experienced lingering service issues that has eroded some of its brand equity recently, which could be partially reflected in its poor Q4 performance.

Supply Side
Based on the transcripts of the various conference calls, it appears that retailers and manufacturers are rationalizing distribution channels, and moving towards highest efficiency, highest measureability. Increasingly, transactions are being moved online.

Benefiting Digital River directly, manufacturers and retailers are cutting more costs by outsourcing the online retail infrastructure. The Company has reported some impressive contract wins. Amazon has taken it further by outsourcing its excess infrastructure through its Elastic Cloud Computing (ECC) business, which grew year-over-year by over 30%.

During 2009, we should see more retailers rationalizing physical networks, while attempting to hold onto consumers via online marketing programs and more e-commerce activity. Multi-channel retailers with the most advanced online retailing capabilities should benefit most.

An area of increased investment is likely to be in the area of transaction efficiency. How can the discovery/decision/buy process be shortened? We should see more attempts at integrating transactions into marketing with more mobility. Look for more integration between affiliate marketing and e-commerce, possibly in the form of increased M&A during the year.

So are the stocks buy, hold or sell? It depends on the investment time horizon, but stocks like Amazon, and Digitial River, with clear hooks into the infrastructure are likely more appealing long-term than category plays such as Netflix where competition could become fierce fast. The stock has had a nice run since the fall and I would be taking profits. It may be a good time for Netflix to think about strategic acquisitions. eBay may find itself in the wilderness during this recession as it struggles to evolve its business model, mitigate some of the potential channel conflicts associated with its Power Sellers, regain consumer confidence, and figure out what to do with Skype. eBay may sit this one out.

I do not own any of the stocks mentioned above.

Tech Earnings This Week: Google Beat As Expected

After the outstanding earnings report from IBM (IBM-NYSE) earlier this week, I suggested that Google (GOOG-Q) would also beat analyst expectations. It did.

Revenues of $5.70 billion were 18% higher than the same quarter of 2007, and a 3% sequential improvement over Q3 2008. Adjusted earnings for the quarter were reported at $5.10 per share versus expectations of $4.95.

Looking deeper into the performance metrics reported, indeed Google seems to be benefiting from the flight to safety by marketing budgets, along with its increasingly international footprint.

Aggregate paid clicks increased 18% over Q4 2007, and 10% sequentially. Revenue from Google owned sites, essentially search, increased by 22% over Q4 2007. AdSense revenues grew by 4%. Revenues from international sources increased as percentage of total sales to 50% from 48%.

Google management chose to take some impairment charges in the quarter, which impacted negatively on reported earnings. However, operationally, it could be inferred that Google performed ahead of expectations. As I expected.

Investors should marvel at the margins of this Company which was reported at 33% in the 4th quarter, which is a 10% improvement sequentially over Q3. It should be interesting to see what happens during Q1 2009, which is typically the weakest quarter for media spending. Notwithstanding, Google should continue to benefit from the "flight to safety" for at least two more quarters.

More surprising this week was the strong earnings report from Apple (AAPL-Q). Although iPhone sales were weak as expected, strong performance from the laptop line of business was a big surprise. As a premium priced product in a declining market, one could predict that this business would crater during the quarter, but instead it powered earnings. International sales again helped push iPod performance ahead of forecasts. Essentially, Apple's diversified product base was critical to its surprise performance.

On the other hand, Nokia (NOK-NYSE) showed a deep decline in performance due to weak handset replacement activities worldwide. As I have stated in an earlier post, people find their mobile subscriptions to be essential, but are choosing to hold off on fancier phone upgrades. On top of that, for consumers actually looking for new bling, they are choosing the iPhone over Nokia products in Europe.

Because Research In Motion (RIMM-Q) looks more like Nokia than Apple from a product perspective, there is probably a greater chance than not that RIM could miss analyst expectations when it reports. However, it was reported during the fall of 2007 that shipments of Storm were better than expected. Unlike Nokia, RIM has been launching new devices throughout 2008, which should benefit performance. However, with iPhone being Apple's weakest product line, and Nokia reporting significant declines in sales, it doesn't bode well for RIM's quarter.

Because Yahoo! (YHOO-Q) has a greater exposure to the U.S market than Google, and because it relies more on impression-based display ad revenue than Google, it could report earnings next week that miss expectations. Management instability, and the erosion of brand equity by incessant takeover speculation do not help, either. Marketers probably do not feel as safe allocating budgets to Yahoo! as compared to Google. Social media players like Facebook and MySpace are a direct susbstitutes for Yahoo!'s portal business, and are nipping at the edges of Yahoo!'s traffic while gaining more mindshare with marketers, which also does not help. If the dominant online media player is showing 18% growth in sales in a market where total growth is forecasted to be around 10%, the performance gaps need to occur somewhere.

I do not own any share in the Companies discussed above.