Dell Stock Looks Attractive After Last Week's Selloff

The last time I wrote about the investment merits of Dell (DELL) was six months ago on May 31st. At that time, Dell stock was trading around $28 and my piece entitled "Round Two from Round Rock: 8800 Layoffs at Dell" concluded that the stock wasn't quite cheap enough to peak my interest, and that a valuation range of $29 to $33 per share looked reasonable if the company did a decent job starting to turn things around.

Last week Dell hosted its first conference call in ages (they had refrained from issuing earnings numbers due to a probe into stock options practices) which was met with high anticipation but some disappointment due to lack of specifics as to forward guidance. The stock fell hard from the high 20's to the mid 20's and now sits at $24 per share. At these prices, I think Dell shares have limited downside and quite solid upside potential. Today's announcement of a $10 billion stock buyback (repurchases were also halted as a result of the options investigation) only furthers that view.

I was vocal about my concern regarding Dell's recently unveiled strategy of venturing into the retail channel due to assumed margin hits that will be taken to get their products into stores like Staples and Wal-Mart, but the company seems to have a renewed focus on efficiency and execution now that Michael Dell is back as CEO. I'm still not thrilled with the retail strategy (it seems like they are choosing market share over profits), but the company assured investors last week that the retail model is profitable for them, so investors can hope that a new customer base will also buy directly from the company in the future, should they like their retail purchases. Therefore, the company could ultimately benefit even more from the retail strategy down the road.

With Dell shares trading at only 14 times forward earnings estimates, I think the risk/reward in the stock is quite favorable at the current $24 quote. Upside of more than 20% seems reasonable over the next 12 to 18 months should they succeed in turning things around.

Full Disclosure: Long shares of Dell at the time of writing

Mobile Phone Initiatives Help Google Become 5th Most Valuable U.S. Company

Google's plans for a strong push into the mobile phone market has excited investors enough to not only push the stock over $700 per share, but perhaps even more startling, the Internet search and advertising giant is now the fifth most valuable U.S. company. For a firm founded in 1998, this is an astounding ascent in less than a decade. My initial thought when seeing this list was to simply conclude that it is really ridiculous, and hence time to unload every single Google share I own. If you just look at the numbers and the other names on the list, it is hard to justify Google coming in at number five, no matter how dominant, profitable, and fast growing they are. But then I started thinking about other ways to put this list into context, and began to able to justify their position.

Let me give a brief explanation and then please feel free to give both sides of the argument from how all you see it. I have said before (and maintain) that investors need to compare similar companies when making valuation calls. They are called "comps" for those of you who have worked, or do work in the investment banking industry. If you are taking a firm public, you look at comparable publicly traded competitors to get an idea of how much investors are willing to pay for your client's shares, which aids you in determining an IPO price. It is the same process when you are selling your home. The comps your real estate agent uses to come up with an initial asking price is based on houses in your neighborhood, similar to yours in size and amenities.

This is important because we need to compare Google to other technology companies. In this case, the comps would be the likes of Microsoft, AT&T, and Cisco. Does Google belong on a list with those other leading tech firms? Well, Microsoft owns the operating system and business software space, AT&T leads in telephony, as well as Cisco in networking equipment. All of these areas have become crucial to everyday life and represent huge market opportunities. Is Google really any different? Sure, the Internet has really only been mainstream for ten years or so, but think about how crucial it has become in most people's everyday lives. Compare how much time you spend on the Internet to the time you spend on the phone on any given day, or using Microsoft Office at work. I bet it is comparable for many of you. For me, it trounces those two.

Some mistake Google for “just a search engine” but we do many more things on the Internet than use it to look something up. Email is a core communication tool, moreso than the telephone, for many of us. Just thinking about what I do online now, the list is quite long. I pay my bills, maintain my address book, get weather forecasts, go shopping, manage my fantasy football team, trade my stock portfolio, check movie times, read blogs, get news reports, get driving directions, book airline tickets, archive my photo collections, balance my checkbook, manage a to-do list, etc. I could go on, but you get the point. Before the Internet I did all of those things via the television, the newspaper, the telephone, through the mail, or at my desk. Now I do them all digitally over the Internet, in many cases with the help of Google software.

If the Internet has transformed our daily lives this much in ten years, isn't it safe to assume that it is not going away? If Google is going to be a leader in providing many of these services, and can make money on them through advertising (much like your local newspaper or television station), then I can completely understand why they would be joining the likes of Microsoft, AT&T, and Cisco in terms of market value. Obviously, things can go wrong and new companies can take over an industry. After all, for every AT&T, Cisco, and Microsoft that has continued to lead despite intense competition, there is a Digital Equipment, Silicon Graphics, or Polaroid that has practically vanished because of it. Google's fate is unknown, but people are betting that they maintain their lead, and I do not think that is such a ridiculous belief to have.

In my mind, if the Internet continues to change the way we live and help us accomplish tasks more quickly and efficiently than prior tools such as TV, phone, mail, or print media, and Google continues to be a leading software company focused on enabling all of these things, who is to say they should not have a seat at the head table with everybody else?

Full Disclosure: Long shares of Google at the time of writing

Google Shows Restraint, Fails to Outbid Microsoft for Facebook Ad Deal

With a flurry of deals in recent months, Google (GOOG) has seemed willing to pay handsomely for attractive companies and contracts. The online ad leader has received mixed reviews for acquisitions of Doubleclick, Feedburner, and YouTube, as well as their exclusive ad deal with MySpace. With news that Facebook was negotiating with both Google and Microsoft (MSFT) on an international ad deal and a minority investment, it would not have been surprising, given their cash hoard and past deal history, to see Google outbid Gates & Company for the deal, even though Microsoft currently runs ads on Facebook's domestic site.

In a shift for Google, reports are hitting the wires that Facebook has secured a $240 million investment from Microsoft, in exchange for an expanded ad deal that covers Facebook's foray into the international market. MSFT is getting a 1.6% stake, which values Facebook at a whopping $15 billion. All this for a company that supposedly is on track for 2007 revenue and profits of $150 million and $30 million, respectively. That's right, Microsoft is paying 100 times 2007 sales and 500 times 2007 earnings!

There is no doubt that adding Facebook to its arsenal of web advertising properties would have been a boon for Google, but given that Microsoft already has a relationship with them, it is not too shocking that they would expand their existing deal. While prices of less than $2 billion for YouTube and $100 million for Feedburner will likely turn out to be bargains, it was likely tougher to justify a $15 billion valuation for Facebook. Many Google shareholders are probably happy to see the company show some sort of financial restraint, even though Facebook is clearly a hot property in the social networking space.

As for Google stock, the shares have soared to $675 on the heels of another strong quarterly earnings report from the company. I still believe the stock will continue its rise, but future gains will likely be far more limited. I will likely want to sell stock when the forward P/E approaches 35 times, which right now would equate to about $718 per share.

For the bears who continue to point to the fact that Google's market cap has irrationally matched or exceeded that of blue chip companies like Citigroup (C) and Wal-Mart (WMT), I would caution people against such comparisons. Lining up a software company side by side with a retailer or a bank really is comparing apples to oranges. Instead, I would suggest you compare Google's valuation with other software companies.

With a low 30's forward P/E ratio, given Google earnings growth projections over the next 3 to 5 years, I think investors will conclude that Google's share price is not only quite reasonable, but will continue to rise if the company can deliver earnings growth rates in the 20 to 30 percent range annually for the next several years. Even if you factor in decelerating profit growth as well as continued P/E contraction, you can still project a stock price meaningfully higher than current levels over the longer term.

Full Disclosure: Long shares of Google at the time of writing

Analysts Got It Right As Google Passes Wal-Mart in Market Value

Regular readers of this blog know that sell-side analyst research reports are not something I reference very often for trading recommendations. The numbers show that analyst picks fail to beat the market consistently, and do so with more volatility, just as most mutual funds do. That said, given that most Wall Street research is positive in nature (they want you to buy stocks, after all, so they make money) there will be a lot of times that I agree with the analysts, merely due to probability.

In May I wrote positively about search giant Google (GOOG) when it was trading in the low 460's (Google Looks Cheap, Believe It Or Not). At the time I wrote that upside to $600 per share looked like a conservative price objective, with downside limited most likely to only $450 per share. This view was also the consensus view on Wall Street, with most analyst price targets right around $600 per share.

Well, the analysts got it right this time, so let's give them credit. Google crossed $600 per share this week, jumping $5 yesterday to reach an all-time high of $615 per share. In doing so, Google now has a larger market value ($192 billion) than Wal-Mart (WMT) ($184 billion), a fact that many seem to find pretty staggering. I want to make two points about this in justifying why investors should not be alarmed by recent trading action in Google stock.

First, the reason why we see analysts now raising their price targets on Google closer to $700 per share is due to the fact that 2008 earnings estimates are approaching $20.00 per share (As I predicted in May) and the company's growth rate should be in the 30 percent range for the next several years. Most any investor will tell you that a P/E equal to or slightly above a company's growth rate is fairly common.

A conservative valuation on Google of 30 times earnings gets you to $600 per share, and a P/E of 35 or 40 for one of the world's fastest growing companies is a price tag that many investors will be willing to pay, hence the rising price objectives. Personally, I would not be loading up the boat on Google at current prices, but a trading range of $500 to $700 per share over the next six months or so seems reasonable. Given we are right in the middle of that range right now, Google shares are a solid hold, with a bias toward profit taking over purchasing if a trade needs to be made.

As far as the Wal-Mart market value comparison goes, the discrepancy that might seem overdone to the casual observer really isn't out of whack with reality. In 2008, Google is expected to earn a profit of $6.1 billion, which is less than half of Wal-Mart's expected net of $13.8 billion. This implies a P/E on Google of more than double Wal-Mart, which is the case (31x vs 13x forward earnings). However, given that Google's margins and growth rates are far higher than the world's leading retailer, investors can easily justify the market values of both companies. That said, Wal-Mart appears to be the better value, trading at a below-market multiples, versus 2x the market for Google.

Full Disclosure: Long shares of Google at the time of writing

Akamai Crushed, Outlook Still Attractive

This will be a fairly short post since I had no plans to write about Akamai (AKAM) today, but after reporting in-line earnings this streaming video content provider is getting slammed to the tune of 18% this morning to $38 and change. Akamai is one of those high multiple growth stocks that everyone expects to beat numbers every quarter. After meeting expectations and guiding in-line for the third quarter, analysts are downgrading and investors are fleeing.

I think the sell-off is overdone and I am initiating some positions this morning. The company's fundamentals remain strong as online video has years of growth ahead of it. All of the sudden the stock trades at only 23 times 2008 earnings. For a growth stock like AKAM, I think that is a bargain. Many investors will worry about margin pressures and such since it appears they are giving price discounts for long-term contracts, but most likely the company is just being conservative.

Given the market they serve and their leadership position, I think a 23 forward year multiple for the stock is pretty cheap. These are the types of earnings season sell-offs that I often like to play on the long side. AKAM shares weren't worth the price at their highs ($57), but now that they are down 35% to $38, I think that falls into "growth at a reasonable price" territory.

Full Disclosure: Long shares of AKAM at the time of writing

Seagate Adopts Baffling Policy on Financial Guidance

I am sitting here listening to the second quarter conference call hosted by Seagate Technology (STX), the world's leading provider of hard disk drives for the consumer electronics industry, and I just had to write a post with the audio going in the background. Seagate CEO Bill Watkins has just announced that his company is changing their policy on company guidance.

I have written on this blog before that financial guidance is very overrated. Many companies have abandoned giving guidance completely (kudos to them) and others have at least stopped giving quarterly projections. So, I was expecting STX to either cease quarterly guidance and give only annual projections, or to halt guidance completely. Wrong on both counts!

Seagate will now give only quarterly guidance. Are they kidding? The whole point of stopping quarterly guidance is to focus management on the long term and not put them in a situation where they might take actions just to hit a number in the short term. Now they are embracing three-month projections?

I understand them not wanting to give out annual projections. The disk drive business is very hard to predict, as it is largely a commoditized market. Supply and demand, and therefore pricing, is tough to gauge over long periods of time. Essentially, STX management is saying they have no idea what they will earn in fiscal 2008 (which began on July 1st).

If you are going to ditch giving guidance, then stop giving guidance! It seems very strange that they say they are focused on the long term, but yet are still going to predict sales and profits every three months. They should have just stopped guidance altogether.

Full Disclosure: Some Peridot clients have positions in STX, but those positions are under review

Calls for Semel's Resignation Were Too Loud to Ignore

Wow, that didn't take long did it? After the bell on Monday Yahoo (YHOO) CEO Terry Semel stepped down, paving the way for company co-founder Jerry Yang to try and get Yahoo back on track. It is unclear at this point whether Yang will hold that post long-term, or what direction the company will choose now (merge or go it alone) but one thing is clear (although not surprising), Wall Street likes the move as shown by the stock's 8% jump after-hours yesterday. It is only up 2% this morning after the company squeezed an earnings warning into last night's conference call. Analysts are taking their numbers down for the current quarter as a result.

Investors and analysts will now begin to throw out every conceivable merger partner for Yahoo to pursue, especially since Jerry Yang wouldn't seem to be the best candidate for a long-term fix. The possibilities are vast, but one rumored deal is very interesting. CNBC's David Faber reported Monday that News Corp (NWS) was considering an offer to sell MySpace.com to Yahoo in exchange for a stake in the combined company. While that is only a rumor of a potential scenario that might be discussed, a deal like that could value MySpace.com at around $10 billion and net News Corp a 25% stake in Yahoo/MySpace. That would be an unbelievable payoff for NWS after they paid less than $600 million for MySpace a few years ago. They could potentially make 16 times their money.

However, there is one issue that could prevent such a deal to even be discussed very deeply. MySpace partnered with Google (GOOG) in a long-term advertising deal last year that resulted in MySpace outsourcing the advertising management of its site to the online ad leader. Any combination with MySpace would force Yahoo to let Google run the ads on MySpace. Do you really think Yahoo would agree to that? Seems highly unlikely to me.

Full Disclosure: Long shares of Google at the time of writing

Four Reasons Why I Covered My Yahoo Short

On Wednesday I covered my Yahoo (YHOO) at $26.90 for a 16% gain. There were a few reasons for the move, but none of them was a new-found enthusiasm for what Yahoo is doing. Essentially, there are a lot of catalysts that could move the stock higher from current levels, and most of the bad news is already known. The risk-reward for Yahoo stock is no longer is attractive from the short side, in my view. Here are my four reasons for covering:

1) Trading at the Low End of a Trading Range

The stock seems to be in a trading range from the mid 20's to mid 30's. Business at the company has hardly been stellar, but the shares seem to have a floor around the current level. It appears things would have to get meaningfully worse from here (which is unlikely) for the shares to make meaningful new lows.

2) Terry Semel's Potential Ouster

The firing of CEO Terry Semel would certainly give the stock a boost. I don't have odds or a timetable for his exit, but if things don't improve quickly, I can't imagine he will be keeping his job for much longer.

3) The Possibility of a Buyout or Merger

Although talks with Microsoft (MSFT) broke down in the early stages, when that rumor hit Yahoo stock jumped 20% overnight. That was scary for shorts like me, obviously. I was fortunate that I didn't cover then, when others did (a deal with Microsoft didn't seem likely, as I wrote at the time), and the stock has come back to pre-rumor levels. However, it's not really an experience I want to have again. While I don't think the odds of a deal are above 50/50, liquidity and deal flow are so impressive these days, it's hard to feel good about being short a stock that could find a dance partner if they wanted to.

4) Panama Will Show Results Eventually

Optimism from management was a little premature, but I have little doubt that Panama will show some positive results at some point. The stock rocketed above $30 the last time this was thought to be imminent, so the same thing could happen if it actually comes to fruition as management suggested months ago.

All in all, the risk-reward in the Yahoo short position below $27 per share isn't compelling enough for me to justify keeping the trade on. As a result, I have booked my profit and will look for other opportunities.

Full Disclosure: No positions in the companies mentioned at the time of writing

Will People Switch to AT&T Just to Get an Apple iPhone?

Frankly, I never thought I would still have long positions in Apple (AAPL) with the stock at $124 per share. I have been trimming it as the stock has climbed, but somehow I still have not managed to close out the positions completely. Despite the fairly high valuation, there is still a lot of momentum at Apple and a high probability that numbers are still too low. Macintosh sales are growing faster than any PC brand, and it is entirely possible that the company can give video-on-demand (VOD) and Netflix (NFLX) a run for their money.

That said, the iPhone hype is a little worrisome. Not only is the stock running up heading into the late June release date, setting it up for a pullback in coming weeks as investors sell the news, but iPhone projections seem to be getting a little optimistic. I am not going to bet against Apple, because they have proved naysayers wrong over and over again, but let me give you an idea as to why I am beginning to wonder if they can live up to the hype this time.

Apple shares got a boost recently when Piper Jaffray analyst Gene Munster upped his price target to $160 and projected 2009 iPod shipments of 45 million units. He came up with the latter number by assuming a 7 percent North American market share for the iPhone, a 3 percent share on the other continents, along with the average retail price falling from $542 this year to $338 in two years. Munster has been overly bullish (and right) on Apple for a while now, but I wonder if that will cause him to stay on the train longer than he should.

My hesitation in accepting these projections as easily attainable is in large part due to the exclusive service contract Apple signed with AT&T (T) for U.S. distribution of the iPhone. In order for Munster's numbers to be right, it appears international sales will have to be breathtaking. In the United States, the big four (Verizon, Sprint/Nextel, AT&T/Cingular, and T-Mobile) have the vast majority of wireless customers (about 200 million as of the end of the first quarter). AT&T only represents 30 percent of that total, so if the other 70 percent of people want an iPhone, they will have to wait five years or switch service providers.

Switching might not be a big deal, but AT&T gets some of the worst customer satisfaction ratings in the industry. When AT&T bought Cingular they were the two worst in terms of satisfaction and network reliability, which caused many to poke fun at the merger. Just how many people will want to switch to AT&T just to get an iPhone? To me, that is one of the top obstacles Apple will have to overcome if the rosy forecasts coming from Wall Street are going to be met. And even if Apple does sell 45 million iPhones in 2009, does the stock price already reflect those expectations?

Deciding whether or not to sell the rest of my clients' Apple shares has been a tough decision. For now I have trimmed back larger positions to be average-sized at most. For now there is enough potential for me to hold onto some shares, but given I am getting a little skeptical, Apple is no longer is a large position in the accounts I manage.

What do you think? Will a five-year exclusive deal with AT&T hurt iPhone sales? If you are an AT&T customer, are you planning on buying an iPhone? If you are with another provider, will you switch to AT&T to get one?

Full Disclosure: Long shares of Apple at the time of writing

Google Hits New All-Time High

Last month I wrote that the risk-reward in shares of Google (GOOG) looked extremely favorable. It just so happened that the stock bottomed two days later and has soared 57 points since. Technicians will likely be pleased to see that Google hit a new all-time high on Tuesday, breaking through a previous double-top.

Hopefully some readers took advantage of Google trading in the low 460's. If you did, where to from here? Well, I have not sold any of the positions I initiated when I wrote the last article. I think a P/E of 30 is very reasonable given Google's growth prospects. With 2008 earnings estimates north of $19 for the company, there is no reason to doubt that a price objective of $575-$580 is attainable in the intermediate term.

Full Disclosure: Long shares of Google at the time of writing