A fellow blogger hits the nail on the head looking at a recent analyst call on IBM stock.
Another Golden Opportunity in Citrix Systems
Software maker Citrix Systems (CTXS) was one of the ten stocks I highlighted on the 2006 Peridot Capital Select List (which, by the way, has returned 18% year to date - look for an announcement about the 2007 Select List in early January). After posting a gain of 40% through the first six months of the year, in my Select List Mid-Year Update I recommended investors take their profits as the stock traded above $40 per share. It appears that we are getting another chance to make money in the name.
After an earnings disappointment, Citrix is trading back down to $28 and change, which is where I recommended purchase at the beginning of the year. Given that the company has the ability to grow sales and earnings at a low to mid double digit rate, the current valuation looks very attractive.
Estimates for calendar year 2007 stand at about $1.50 per share. The company's balance sheet is pristine, with no debt and $736 million in cash, which equates to $4 per share in net cash. So, investors buying CTXS at $28 are getting a stock with an enterprise value of only $24 and $1.50 in earnings power. This equates to a 16 forward P/E multiple, which in my view is too pessimistic given Citrix's growth outlook.
I would expect Citrix shares to head well into the thirties again during 2007, and as a result, suggest investors reenter the stock. Evidently, CTXS management agrees the shares are undervalued, as they just announced a new $300 million share repurchase authorization.
Full Disclosure: I own shares of Citrix Systems (CTXS), as do Peridot clients.
Amazon Bulls Might Need to Calm Down
Wall Street is apparently thrilled with the third quarter earnings report from online retailing giant Amazon.com (AMZN), as judged by the stock's $4 (12%) jump in today's session. While I am not long the name, if I was, I'd be trimming it. Amazon is a retailer, plain and simple. Therefore, the current P/E multiple the stock garners is quite ridiculous. Back in 1999, the bullish argument for the company centered around the idea that without physical stores, Amazon could earn much higher margins than a Borders, or a Best Buy, or a Wal-Mart.
That thesis, however, has proved to be incorrect. Amazon's margins are not any better than your traditional big box retailers. In fact, Amazon's operating margins trail those of Target, Wal-Mart, and Best Buy. Turns out that warehouses carry the same costs as actual storefronts. With most retailers trading at less than 1.0 times revenue, Amazon trades at closer to 1.5 times.
The company's growth rate does exceed its competitors, for now anyway. Since Amazon has only been around for about a decade, they can roll out new products for a while before becoming mature enough to truly become a one-stop shop for everything. That said, I don't see how the company deserves a P/E multiple of more than 25 or 30 times earnings, as their growth should slow to below 20 percent going forward.
Right now shares of Amazon trade at about 80 times this year's expected earnings. Even if the company can grow the bottom line by 67 percent, as investors are expecting (that sounds optimistic to me), we're still looking at a 2007 P/E of more than 50 times. I just don't know how anyone can justify such a lofty price for the stock. If you think I'm wrong, please share your views.
Google Still Eating Yahoo!'s Lunch
Shares of Google (GOOG) are soaring about $30 per share, or 7%, today after another very impressive quarterly report. After a profit warning from Yahoo! (YHOO), many Google skeptics postulated we could see some slight weakness in the search leader's business, but they turned out to be very wrong. At least for now, issues are Yahoo! appear to be more company-specific than industry-specific. The way I see it, Yahoo! is simply becoming more and more irrelevant in the portal space.
As I have been doing periodically, I will once again update my views on the long GOOG/short YHOO paired trade I originally recommended at prices of $403 and $32, respectively. Today's huge move up for Google, coupled with a 1 percent drop in Yahoo! brings us to $455 and $23 per share. This results in both stocks trading at about 35 times prior 2007 estimates. After the Google report, 2007 EPS numbers should move from $13/share toward $14/share.
Now that their multiples have essentially converged, which was the thesis behind the paired trade, what do I expect? At this point, I think it is reasonable to put Google at 40x and Yahoo! at 30x forward earnings. If Google hits $14 next year and Yahoo! meets their numbers, we are looking at around $20 per share for YHOO and $560 for Google. That would give this trade another 15 or 20 percent upside from here. As a result, I'm letting it ride.
Google/YouTube Deal Finalized
Very interesting (and dead-on in my opinion) take on the Google/YouTube deal, courtesy of former Internet analyst Henry Blodget's blog:
http://www.internetoutsider.com/2006/10/youtube_and_seq.html
Google Still An Active Deal Maker
Internet search leader Google (GOOG) remains on the cutting edge, making deals with various web properties and content companies. After locking up an exclusive advertising pact with MySpace, reports indicate the company could partner with, or buyout online video leader YouTube for as much as $1.6 billion. While many people will argue whether or not the potential price tag is too high, investors need to realize that forking over a few billion to secure two of the Internet's most visited sites is chump change for Google.
With $10 billion in cash and a very strong stock price to use as currency for deals, trading 1% or 2% of their company for these deals is merely a drop in the bucket. Not only will these deals allow Google to maintain impressive growth rates in its U.S. business, but it further widens the gap between them and the competition. Today's announcement of a deal with Warner Music and Sony BMG to distribute fee music videos is yet another example of how Google is leading the way in online content innovation and the advertising that will undoubtedly support such initiatives.
With Yahoo's stock stagnant and Google shares jumping again today, I just checked out my long Google/short Yahoo paired trade to see where we stand now that Yahoo has fallen from 32 to 25 and Google has jumped from 403 to 428. Despite the postitive return from the trade thus far, Google still trades at a discount to Yahoo on projected 2007 earnings per share (33 times versus 39 times). As a result, I am keeping the trade on for now.
Analyzing Yahoo!'s Profit Warning
Two months ago I outlined a long Google/short Yahoo! paired trade as a way to play the possible p/e multiple convergence of the two leading Internet advertising companies. This week's third quarter warning from Yahoo prompted an ugly sell-off in the name. Google shares were down for the day as well in sympathy, but it dropped far less than Yahoo!, which is exactly what the paired trade is supposed to capitalize on.
The question we have to answer now is, "What do we make of the Yahoo! shortfall?" There are two ways we can go here. One, the Yahoo! warning signals that the economy is slowing significantly and advertising clients are pulling back their ad budgets. This would hurt Google in the same way as Yahoo!. On the other hand, it could simply be that Yahoo! is becoming less and less relevant in the advertising space, and Google continues to steal market share.
Back in July when I first wrote about this trade I was in the latter camp. I remain there today. I think Yahoo! is getting beaten at the same game they once dominated. Google is dominant enough in domestic search that most of the market share gains have been made, but they still are doing better than Yahoo! on a relative basis.
This is not to say that a slowing economy would not hurt Google as well. When the day comes where we see dramatic ad budget cutbacks, it will be time to exit both stocks. I just don't think we are seeing that yet. Last quarter we saw a bad quarter from Yahoo!, followed by a strong report from Google. That supported my thesis. This week we found out that Yahoo! again is having trouble. I think Google will post a solid third quarter, and as a result, I am keeping the paired trade on for now. When the online advertising market starts to suffer due to the business cycle beginning to turn over, then I'll take the profit from the trade and move on to something else.
Full Disclosure: I have a position in the paired trade mentioned above, long shares of Google (GOOG) and short shares of Yahoo! (YHOO).
Apple Shares are Pricing In Positive Catalysts
In recent months I recommended investors take a close look at shares of Apple (AAPL) after they concluded a long descent from a high of $86 per share all the way down to the mid 50's. While the P/E multiple on the stock has never been low, even after a 35% haircut in the shares, the company does have more than $10 in net cash on its balance sheet, as well as something that fewer and fewer companies have going for them at this stage in the business cycle; excellent growth
.In anticipation of new product announcements, shares of Apple have rallied lately and are surging nearly $3 today to more than $72 each. For those of you who did some bottom-fishing in the 50's, I think it may be wise to take a few chips off the table. The company's outlook remains very bright, and growth managers will want to own the stock, but I think a lot of good news is being priced into the shares. Any disappointments regarding the specifics of the company's new products, and we could see some of the recent gains given back.
Apple remains one of the most attractive growth opportunities in the technology space. I just think after a 30% rebound from the lows, slight profit-taking might be in order as investor demand right now is quite elevated.
Does the Jobs/Schmidt Pairing Signal a Future Alliance?
Who are the two leading innovators in the technology industry today? Google (GOOG) and Apple (AAPL) would likely garner a lot of votes should we take an official survey. News that Google CEO Eric Schmidt will join Steve Jobs on Apple's Board of Directors is very interesting. Warren Buffett and Bill Gates expanded their relationship in part via sharing seats on a board. That relationship has grown over the years and eventually resulted in Buffett's gigantic donation to the Gates Foundation.
Does this mean that some sort of Apple-Google alliance or partnership is only a matter of time now that Jobs and Schmidt are on the same board? Not necessarily. Closer relationships can certainly lead to business ventures, but this is by no means assured. Does the potential for two technology leaders mean investors should consider buying shares of Apple or Google based on this news? Hardly.
Nonetheless, it is clear that Steve Jobs feels strongly that input from Google's CEO could help it continue to grow. Five years ago Apple and Google would have had no place on a list of leading innovators in Silicon Valley. Things certainly do change rapidly in the industry, and that won't be changing anytime soon.
Google/MySpace Deal is a Win-Win
Yesterday Google (GOOG) was awarded an exclusive online advertising deal with News Corp (NWS) subsidiary MySpace.com. The agreement, valued at $900 million, runs through 2010.
The reason I think it is a win-win for both companies is fairly simple. MySpace has done an exceptional job attracting users (around 100 million and counting at last count) but thus far has not really focused on monetizing that traffic. By bringing in Google to provide search and online ads to the site, they get the best-in-class company to manage that aspect of the business for them. And given that Google has billions in cash, MySpace likely chose them (over the likes of Yahoo, MSN, Ask, and AOL) not only for their superior technology, but also because Google's huge war chest allowed them to offer the most revenue share.
From Google's perspective, it is also a smart deal. Sure, $900 million over three years is a lot of money to spend, but they have been raising additional capital for these types of investments ever since their IPO. Think of this very similarly to the $1 billion they shelled out to get their Google Pack software pre-installed on all new Dell systems.
With Google running away with the U.S. online ad market, the market is becoming more and more saturated. Keys sites like MySpace, that don't have advertising partners yet, are few and far between, and are crucial partners if Google is going to continue to grow at the rates investors expect. The potential for international growth surely trounces that of the United States, but Google has had a tougher time dominating the online ad market overseas thus far, making continued U.S. dominance very important.
Google needs growth. MySpace needs to make some money. As a result, this deal seems like a perfect match to me.