Tuesday, May 31, 2005
Thursday, May 26, 2005
Navarre (NAVR) shows solid strengthI've been in Navarre ever since it fell to below $7 after announcing the FUNimation deal. I really like this story because it appears to be a case where the market got it completely wrong. In fact, I'm beginning to really enjoy when the short hoards crush companies because that's when I find really good values.
Navarre was beaten down because they did a game changing acquisition at the same time the market felt that they were/are overexposed to Anti-Virus software. Microsoft's announcement of free AV hit a lot of the players hard. To compound the problem, Navarre ended the quarter with $5K of cash in the bank, which was just a bad move optically. So, the market felt they had a hat-trick of badness in Navarre. But they were wrong.
First, the acquisition of FUNimation actually makes a lot of sense and will likely end up strengthening Navarre's position. Navarre has been a distribution company; they distribute video games and software to large retailers. The distribution business is a notoriously low-margin business model, so management acted to change it. They bought FUNimation, a company that licenses Anime content for the U.S. market. Anime is on a significant growth tear as it penetrates the mass U.S. market. Barnes & Nobles and other mass booksellers have installed Anime sections. It's clear that American youth are warming up to this asian cultural phenomenon with increased exposure -- it's new, fresh and different. Additionally, this business has much higher margins that Navarre's existing distribution business -- something along the lines of 35% v. 15%. If Navarre is able to get additional growth from the content and improve their operating margins, then the stock is extremely cheap.
Addittionally, the shorts did a lot of damage because when the company went to the equity markets to pay for the deal, their price no longer made it possible for them to complete it. It's clear that Navarre made a stupid mistake in committing to the deal before having the funding in place. The company then went to the convert markets and were shut out there as well. Most observers felt that they would have to unwind the deal. But, if one looked closely at their balance sheet and noticed the relationship with GE Capital, they should have realized that they still had another out. GE Capital does quite a bit of acquisition financing. I know some of the people they have in that organization and I deeply respect their skills and abilities. Therefore, when I saw that they financed the deal, I knew that this was a good one. GE does a lot of homework and was privy to a lot of documents and forecasts that we as investors are not. If they liked, I liked it. GE liked it so much they threw in additional dept capacity for general corporate purposes just to silence the liquidity critics.
I think this stock has a lot of upside as people begin to realize not only that the ocmpany is NOT in trouble with their Anti-Virus distribution, but also has significant growth ahead of it with the new Anime business as well. The next couple of earnings announcements should be a blast.
**Comments are appreciated. I'd love to hear supporting and disagreeing theories!**
Figuring out Apple (AAPL) right nowApple is enjoying a strong run at the moment. It’s moved up strongly in the last two weeks and I’m not quite sure why. Don’t get me wrong, I like the company and the stock. But I liked it a lot more at $19 a couple of years ago when everyone analyzed them based upon their PC market share. Right now, I feel like it’s getting frothy.
As far as I can tell, the stock strength is based upon the following two factors that are currently in the news:
- Potentially switching to Intel chips. This could be important as I’m sure they’re paying a pretty penny for IBM’s chips right now. However, a transition like this will take at least a year before it begins to impact the bottom line. And even then Apply may have to spend a bit before they see real savings in redesign and transition costs. Switching chip manufacturers when your chips are part of your hardware advantage can’t be very easy. Some sources are even saying that the news could be a ruse to get IBMs attention, and knowing how Jobs operates, I believe it.
- iTunes will support podcasting next year. Okay, this is great and all, but I don’t think the stock should be rallying on this news. Podcasting is the current democratic media technology du jour: it allows people to create “radio shows” on their computer and distribute them through the Internet. While interesting and certainly disconcerting to radio stations, I don’t see how Apple monetizes this trend. Additionally, the fundamental technology is very simple. Record a show on an MP3 and send it through the Internet and you’ve got a podcast.
Now, I could also be completely misreading the situation as well. It may very well be that intelligent institutions are starting to realize that Apple has other cards to play. I think that there are three other reasons to own Apple. Right now, Apple’s current story is that the iPod phenomenon is drawing computer buyers to their desktop and laptop products. The data shows that they are progressing nicely against this expectation.
The other two reasons have to do with large, potential markets that Apple could monetize if things go their way. First, Apple is trying to make a play for the mobile phone market by partnering with Motorola to integrate iPod platform technology into the phones. Interestingly, we haven’t heard much of this since the false start a few months ago where Motorola *almost* debuted such a phone at a conference. The debut was squashed by Apple, I believe, because they understand that it will be very difficult to get wireless carriers to accept this technology. The wireless carriers are loathe to let Apple capture song economics on their platform. The phone manufacturers, however, realize that integrated phone and iPods could create a huge phone buying opportunity and would like to see this happen sooner rather than later. In summary, I think this is a big upside for Apple, but I put a low probability of happening anytime soon.
The second reason to own Apple is their small-business initiative, which I also haven’t heard a lot of lately. The thinking goes like this: If you’re a small business owner, you probably don’t want the hassle of maintaining a Microsoft-based computer environment. It’s a royal pain in the ass. Networking, anti-virus, spyware, upgrades, program incompatibility, etc… All of Microsoft’s minor flaws are adding up to be one big pain in the ass for small business people who don’t have dedicated IT departments and even less time. Apple has opportunity to demonstrate how their computing platform is significantly better in all of these areas and should be the small business owners computer of choice. But considering I haven’t heard much from the company lately about this, I don’t have a good feel of how likely this will happen.
So, if Apple’s recent strength is based upon an Intel alliance and Podcasting, I’d be selling into the strength right now. However, if it’s because of progress in the mobile music or small-business categories, then I maintain my confidence in the company.
**Note: Please feel free to leave comments below as I’d like to hear intelligent points of view from others.**
Friday, May 20, 2005
What Google (GOOG) has in store...I found the following page with a Google presentation outlining the company strategy. My thesis for Google is that the market is still underestimating the potential for this company. This is largely because investment professionals tend to be very skeptical about believing in the future. I have some aspect of this myself (see: recent HPQ post). However, I believe that GOOG lies in the middle of some very durable, very big trends. The presentation does a great job of outlining this opportunity and giving a snapshot of just what the company is doing on a day-to-day basis to capture the market. You need to have a few beliefs in owning Google:
1. That the migration of TV advertising dollars to the Internet has just begun.
2. Google will be able to achieve substantial international growth.
3. They will develop services in their pipeline that will rival their current revenue and profit streams.
I believe all three are true and that the stock is cheap at current prices in the long term.
The best precedent for Google is eBay. There were lots of doubters all the way up over the last few years. But having a truly scaleable Internet business that appeals to the mass market can be much more lucrative than most investors can imagine.
Wednesday, May 18, 2005
I wouldn't jump into HP's que
Hewlett-Packard+Compaq’s shares have risen almost 25% in the last week, powered by a jump based upon today’s ‘strong’ earnings report. Wall Street was excited that the company didn’t lose much business based upon the executive transition from Fiorina to Hurd. While I like Hurd's background, I’m not buying into the turn-around story yet and I think money would be better invested elsewhere in tech. I think HPQ has a long way to go before it sees the benefits of Hurd's efforts.
Tech is not a sector to be holding broadly at the moment (or for the near future for that matter). While I won’t go as far to say that we’re ‘separating the winners from the losers’, I will say that I’d rather hold names that are executing very well in growth markets (hi GOOG!). Hewlett-Packard is not one of those companies, in my opinion.
Let’s review recent events for this company:
- The company known for advanced technology innovation achieves strong growth based upon PC manufacturing while other tech companies in
- Then it brings in a CEO who looks great on paper, is female and is an excellent presenter.
- HP runs into serious competition in PCs, at which point it decides that the best thing for it to do is buy another PC manufacturer, Compaq, in order to achieve scale in the quickly commoditizing industry.
- One of the board members and founding family members correctly but unsuccessfully attempts to halt the merger. His loss is largely due to the fact that he possesses less charisma than the CEO.
- HP lucks into a business that is low-tech but lucrative as a saving grace: printers and replacement cartridges.
- The CEO then tries to refashion its image to match IBMs.
- After it becomes painfully clear that HPQ is not IBM, the CEO is fired.
- A new CEO is hired to bring some semblance of order to the mess.
- HPQ has a ‘less-than-feared’ quarter and rebounds significantly in value.
Give me a break? This is a company in transition to better things? I’ve worked with companies in trouble before and one thing I know is that they have to hit bottom before they turn around. HPQ is not even close to the bottom. In fact, HP hasn’t done much of what it is vaunted for: innovation. HP’s greatest innovation in the last 5 years is its printer business, and I don’t see how they maintain competitive advantage in that business.
HPQ’s ONLY saving grace is its printer business. Everything else should be scrapped. This company has been a bureaucratic mess for a long time. They’re fighting for dwindling shares while smaller, nimbler, younger, better-positioned, less-baggage-carrying companies are driving success around them. Additionally, I believe that success in business has a lot to do with the people within a company. HP right now is either: A. firing a lot of the people responsible for various aspects of running the company, B. lowering salaries across the board, or C. letting the people who screwed things up in the first place remain in their seats. It's a no-win situation for the investor.
You can guess what I’d be doing with HPQ’s recent rally.