Dell's Demise?

Dell Computer (DELL) stock has a special place in my heart. It was my single greatest stock purchase, and very well could remain that way for the rest of my life. I bought shares in January 1996 for 94 cents each (split adjusted) after the stock got hammered as the company stumbled with its notebook computer line. Dell peaked at $60 as the Nasdaq passed 5,000 in early 2000.

Why do I bring this up now? I haven't owned the stock in years, but I am now taking a look at it again. Pricing pressures have compressed margins and sent shares down to $24 each. Dell has elected not to use Advanced Micro Devices' (AMD) chips in its boxes, and as a result, they have had a hard time competing with those suppliers that do diversify away from Intel's (INTC) more expensive offerings.

I am not saying that Dell stock is poised for the late-1990's-like ascent. Those days have long passed. However, Dell now trades at a discount to IBM (IBM) and I think that makes little sense. Dell has $5 in net cash per share on its balance sheet, taking its enterprise value down to $19 per share. That's a trailing P/E ratio of merely 12.

Is Dell going back to $60 anytime soon? Not a chance. However, for those looking for cheap large cap values in technology, the current valuation the market is assigning Dell implies extreme pessimism about the company's future. The January 2008 $20 call options look especially attractive at $7 each.

McNealy Out at Sun Micro

Shares of Sun Microsystems (SUNW) opened up more than 4% on Tuesday after CEO Scott McNealy announced his resignation last night. There is little doubt that new blood at the helm of the once high flying tech company is a good step for the company, but is SUNW stock a good buy?

Despite a huge cash hoard, the SUNW shares have been stagnant as financial results have left much to be desired. The main thing holding back the stock has been a lack of profits. The company's cost structure is so bloated that even with billions in revenue, they aren't making a dime. The strong balance sheet, coupled with an attractive price-to-sales ratio has gotten many value investors to bite in recent years, but they have little in the way of profit to show for it.

Without profits, investors can't assign a multiple to earnings. Even if the company were able to swing earnings of 10 or 20 cents per share, the stock doesn't look cheap. A 16 or 18 P/E on even $0.25 of EPS and you get a share price lower than it is today. It is possible that a new CEO can turn the company around, but until consistent profitability is demonstrated, Sun Micro shares will be laggards.

Apple Shares Surge on Windows News

With Apple (AAPL) garnering only 3 percent of the U.S. personal computer market in 2005, it's not hard to see why the company's shares are surging 7 percent today. With news of a software program allowing users to run Windows XP on Macs released this morning, all of the sudden the company can go after much of that other 97 percent. Apple's design team certainly has a unique opportunity here. I don't see why they couldn't get 10% of the U.S. market within 5 years with the right new products.

Google Beats Me to the Punch

Just as I was readying a blog posting concerning the $50 jump in Google (GOOG) shares since news hit last week that the Internet search giant would be added to the S&P 500, the company beats me to the punch. I was going to point out that the more than 15 percent jump in Google stock was based solely on index fund buying, and therefore upward pressure would likely dry up next week. I was even considering a small short trade in my personal account. Looks like Google beat me to the "sell" button.

Wednesday afternoon we hear that they plan to sell 5.3 million shares of stock, in part to accommodate index fund demand. Don't let this announcement fool you. These Google guys (and gals) are very smart. What better time to announce a big share offering than right after your stock has moved up more than 50 points without any fundamental change in business prospects?

Whether the offering halts the S&P 500 related rise or not we'll just have to wait and see, but don't think for a second this announcement is coming out of the goodness of Google's heart to help some index fund managers out with extra shares. They're just looking to cash in on the S&P 500 inclusion like everybody else.

An Apple To-Day?

I've been out of Apple (AAPL) stock for the entire run over the last couple of years. I looked at it many times back then given its insanely low valuation but never liked the business. They had half the market cap in cash on hand with no debt, but I never could figure out what the catalyst might be.

Then the iPod happened and the run began. Two years later the stock is 600% higher, hitting a high of $86 in early 2006. I haven't chased the stock on the way up, but for the first time in a long time AAPL shares appear reasonably priced. In case you haven't noticed, the stock is down 30% from its high to a current $60 per share.

Current earnings estimates stand at $2.25 for 2006 and $2.75 for 2007. With $10 per share in cash and no debt, investors are getting the business for 22x current year profits. Looking out to 2007 the P/E drops to 18x. If any of you are out there wishing you hadn't missed the run, the stock is down 26 points from its high and looks appealing if you think growth will continue for some time.

Intel vs AMD

Since a reader brought up Intel (INTC) in a comment on my prior post, I decided to take a closer look at the history of the Intel vs Advanced Micro Devices (AMD) battle. It seems to me that whenever AMD was successful taking share from Intel, and the stock price outperformed, it was a short-lived phenomenon. The chart below comparing Intel and AMD since 1998 does a great job showing visually the cycle I referred to in response to Simon's comment in my prior post.

AMD taking share from Intel, and the resulting stock price rally, is something have happens fairly regularly. However, the chart shows that when AMD takes off it rarely can maintain the business momentum (due mainly to Intel's high responsiveness to such events), and when optimistic profit estimates aren't reached, the stock comes tumbling back down to earth. Could history repeat itself? I tend to think it will, although the timing will not be easy to pinpoint.

WSJ Exposure and a Stock Pick

Thanks to Kevin Delaney and the rest of the team at The Wall Street Journal for featuring me yesterday in a front page story about my trading in and views on Google (GOOG). It certainly made for a fun and eventful day, most notably a full inbox and a phone ringing off the hook. If you would like to read the story, it can be accessed through wsj.com in addition to March 2nd's hard copy. I also have an electronic copy if you aren't a WSJ online subcriber, so email me if you'd like a copy.

On to the market. I have been pleasantly surprised how well the market is acting so far this year. I am tempted to take some money off the table, but the momentum is clearly strong right now. Hopefully nothing will get in the way of that. What do readers think? Feel free to comment.

As for specific stocks, I would suggest investors take a look at Abercrombie and Fitch (ANF). The stock was down $6 yesterday after weaker-than-expected same store sales for February. A lot of hot money was in the stock, so the decline may have been more than normal. Keep in mind that SSS were still up more than 5% for the month, and February is the second least important month of the year for retailers. The stock looks very cheap down here under $60 per share.

Vonage Files for $250M IPO

Phone service upstart Vonage Holdings has filed initial paperwork with the SEC, the first step toward a possible IPO that aims to raise up to $250 million. Given the recent appetite investors have had for well-known consumer-related initial public offerings (Chipotle, Under Armour, to name a couple), the timing of this filing makes sense from the corporate perspective.

So, does the stock make for a good investment? Should the IPO come to fruition, we'll likely see a huge first day spike, allowing all of the investment banks' best clients to make a bundle. However, a closer look at Vonage's financials shows that any after-market valuation might be too high. For the first nine months of 2005, Vonage lost $190 million on sales of $174 million. Marketing costs totaled $176 million, a staggering figure.

IPO proceeds would undoubtedly go toward more marketing. While Vonage does have 1.4 million customers, how much are they actually worth? The Vonage service is a commodity, offering no differentiation from Comcast's service or anyone elses. Vonage is under cutting the competition on price ($24.95 for unlimited long distance calling to the U.S., Canada, and Puerto Rico) but there is no reason to think larger players won't attack that advantage in the future, and company's like Skype are focusing on free consumer voice services.

Much like other data and voice services, more competitors will enter the market, pushing prices down. Without a differentiated product offering, Vonage shares will likely be overpriced by retail investors should the IPO go smoothly.

Google and Wall Street Finally Converge

After picking up some Google (GOOG) shares yesterday afternoon as the stock plummeted from $430 to $350 on word of their disappointing earnings report, I just sold those shares, and all others I own for myself and for my clients, at $400 per share. Think of it as wanting to go out on top after a great trade.

The case can be made that Google should be held at current levels. Inclusion in the S&P 500 will be upcoming, and word is that the company will be announcing several large distribution deals with large, popular content providers in coming months. There will be positive catalysts after last night's shocker.

After all, if Google gave quarterly guidance like other firms, investors and analysts would not have been surprised with a headline EPS number of $1.54 per share for Q4, because they would have known where tax rates were going to be. The business is still solid, taking market share and expanding into new areas. Last night's report did not show that fundamentals have deterioriated. Rather, growth is simply slowing down due to the law of large numbers. That is the bullish case.

However, these are not the reasons I have owned the stock since $170 per share. The "value" I saw had to do with the fact that the Street didn't fully understand what the earnings power of the company's search franchise was. If investors knew Google could earn $8 or $9 in 2006, their IPO in August 2004 would never have been priced at $85.

Last night's report showed me that Wall Street is no longer underestimating Google's growth outlook. Earnings, adjusted for the tax rate increase, were a few cents above consensus, but below the highest printed estimate. Revenue came in right at the estimate. Upside from domestic search appears limited from here.

Does that mean the stock is done going up? Not necessarily. Google is investing huge amounts of money in international operations and new products outside of core search. The potential is huge, and they have the money, the people, and the momentum to conquer new markets. The next task for Google is to monetize these other products. Can they make decent money with Gmail, Google Video, Google Earth, Google China, Google Images, and the many other areas we are speculating they will enter?

Nobody knows for sure. Bulls on the stock believe they can. However, just because they are in position to do so does not mean they will. If they can monetize these product lines, growth will continue and the stock could very well go a lot higher. However, it is not as clear to me that this will happen, at least not as clear as it was that GOOG was too cheap at $170 per share.

Google is trading at 45 times this year's projected earnings. The issues the company addressed last night (growth deceleration in search and massive spending on international markets) could very well result in more earnings disappointments in the near term.

The risk-reward outlook seems to be less compelling to me today. Maybe that will change in the future if we get another quarter or two of disappointing earnings, or if other product lines boom, but right now I'm content with selling at $400 and seeing how it all plays out.