by Kris_Tuttle on February 8, 2010
We published a short research note on QuinStreet on Friday based on our initial investigation into the “vertical” online direct marketing space. The company is on the road for an IPO managed by Credit Suisse, Bank of America/Merrill Lynch and JP Morgan. (Interestingly an old hand in the tech IPO space, Frank Quattrone, is back in the game acting a special “IPO advisor” to the company. We like that trend.)
Most investors got an education on this market from companies like BankRate (RATE – acquired by Apax for $571M) and more currently companies like Monster Worldwide (NYSE: MWW $14) and WebMD (NASDAQ: WBMD $39) which have a readership and traffic slice that is far more specific to the domain area than the more general traffic at “horizontal” online marketing locations like Google, Microsoft, Yahoo or AOL.
The marketing spend has been moving online for some time now and is poised to continue given that it still has quite a bit of “catch up” to do in order to reach current viewing levels of online versus offline content. So the space is large and has strong fundamentals. In the S-1 filing the company cites a total market of $149B for direct marketing, of which about 16% is spent online. So the TAM looks good.
However companies like QuinStreet are focused on more of what we would call a considered purchase. That is a decision that will require some thought and investigation. These include high ticket and complex products and services. Things like online education programs, insurance, a medical operation and home remodeling all fall into this category.
For purchases like this content is important. So QuinStreet actually owns a large number of “feeder” sites that are used to attract, qualify and harvest potential purchasers for their clients. QuinStreet has purchased online properties like www.insure.com and many smaller sites. It might not be fair to call the company a roll-up but it is clear that acquisitions (there have been over 100 of them since 2007) will be a major component to the strategy.
QuinStreet gets paid based on success versus general advertising which is based on “impressions” or even clicks. Marketers using QuinStreet only pay for qualified leads, opt-in decisions and other results which are more readily quantifiable in business and financial terms than online branding and traffic generation.
QuinStreet has been growing this business steadily for over a decade. With current revenues around $300M on a run-rate basis and 20% EBITDA margins the business is financially very attractive.
The vertical online direct marketing space hasn’t received the same degree of attention that the broader search and advertising area has but it looks like an attractive niche.
The maturity and profitability of the company would suggest to us that a public-market transaction can happen (unlike FriendFinder Networks which pulled their IPO again) The current pricing range is a bit aggressive given that mid-point is only a few dollars from our estimate of full intrinsic value but in the end the market will decide where the shares should trade.
If this IPO is successful it may help lesser companies like TheStreet.com (NASDAQ: TSCM – $3), WebMediaBrands (NASDAQ: WEBM – $1.13), TechTarget (NASDAQ: TTGT – $5.31) get a little more interest from investors.
At the same time more established companies like WebMD and Monster Worldwide may get some additional credit for having the same or very similar opportunity to receive fees from vendors based on lead generation, opt-in and other “no lose” propositions.
Anyone interest in the research note itself may get it at no charge as a Research 2.0 member but this requires free registration and approval. More information can be found via this link.
[Disclosure: The Research 2.0 model portfolio has a long position in Google. No positions for any of the other companies at the time of this writing.]
by Kris_Tuttle on February 4, 2010
We’ve been on the Nvidia case for some time now. See some of our past research publications to get caught up.
Semiconductor specialists The Linley Group recently posted some details around the performance of the Nvidia Tegra 2 which we will see in numerous devices this year.
(There’s been plenty of coverage of what’s inside the A4 so I’m not sure why they are playing possum on that one. See other sources on the A4.)
There are so many races in the mobile Internet device space (smartphones, netbooks and now tablets) that it will be a free-for-all. Add to it the fact that even the TV in the living room is going Internet this year and the demand for new processor architectures and capabilities will be mushrooming.
These are interesting times not just for Nvidia but also for Intel, AMD, Qualcomm, and ARM. It’s hard to get excited about Intel here given the risks to their growth and margins unless they can change their stripes and embrace the idea there there is more to life than the CPU.
Our positive views on Nvidia are rooted in the fact that computing is shifting from processing words and numbers into not just video but games, rich content and interfaces that behave with physical properties and the deeper content that 3D provides.
It’s also true that consumers are expecting to be able to do many of these fairly complex things at once; all on a hand-held device with hours and hours of battery life that costs around $500.
Architecturally this suggests we move into a hyper-multi-core kind of processing to be able to parallelize the processing to meet the demands all this software has on the hardware.
Performance per watt remains a major issue in the mobile space and the one area where we think Nvidia still has some strides to make. This is an area where ARM shines and they are making some improvements in their graphics processing ability.
Our conclusion is that investors will want to play this disruption in computing architecture and we find Nvidia to be the most attractive in terms of execution, design wins and software momentum.
If Nvidia could understand and really consolidate their position in software the company and the stock would be a huge winner. However based on all our research we don’t quite see that happening. Our IV on NVDA leads us to expect a share price this year of $19-20 this year.
[Disclosure: The R2 Model Portfolio has a long position in the shares of Nvidia and Qualcomm.]
by Kris_Tuttle on January 26, 2010
Back in 1994 I started sporting around with the tablet computer pictured below. At the time I was on the Institutional Sales desk of S.G. Warburg on 52nd Street in NYC. So of course everyone thought I was quite the nerd. However it was made by a company we were talking to about research coverage and someone needed to try it out.
The company had these units designed by the same design firm that Apple was using and according to the CEO even some of the same people were involved in this project. The device was then manufactured by IBM. So the fit, finish and quality was quite good. The surface remains very pleasant and can be described as a kind of sueded metal overall.
The guts of the machine were pretty standard. Either a 386 or a 486 powers it and it runs Windows with all the standard elements. It also has a keyboard and a small bar that folds out in the back to allow the unit to stand as you can see in the other picture. Also shown below is the pen which was needed to work with the touch screen.
Basically when at a desk this computer functions much like a small desktop. The difference is that when you carry it around the touch screen and pen mean that many operations can be performed on the go and more easily than would be possible with a laptop.
Of course the TelePad didn’t take off and the company is gone now along with their thinly traded stock and warrants. One obvious problem at the time was the lack of wireless networking and development of the Internet. Most of the time the main application running would be Word or Excel.
The display and pen interface were also not a joy to use. The screen was not very bright. The pen wasn’t very sensitive and there was no effective handwriting recognition or even gesture support back then. So it was a novelty. If I remember correctly they were not cheap either. I bought one but was given a special price, I think I paid around $1,500 for the whole kit.
Now that this little bit of nostalgia is out of the way what does it mean for the Apple Tablet of 2010?
I’ve seen what appears to be a real set of images on what the Apple tablet will be but I’ll reserve judgement until I really know the details. One thing that I noted in the unverified images is the MacOS screen. If that’s the basis for the user interface I think it means that we still have more work to do.
Different form factors demand different, more purpose-built, interfaces. When the BlackBerry came out it had a four line display and had all the controls needed to process email effectively. Nobody wants Windows on a small device.
Apple did a separate OS for the iPhone and that has served them quite well. Of course the tablet is in the middle and combines features of a smart phone with those of a small laptop computer. Special applications like an eReader would come for free in the bargain. But the OS should be special. Combining features of the iPhone with an eReader and maybe a few other services that will be a good fit for tablet usage. Nobody is going to want to use the Adobe Creative Suite on this or even the Microsoft Office Suite. They may wish to post to a blog, make and show presentations, watch movies and videos, play games, etc. The tablet should be different, not a shrunken laptop or a big iPhone with a touchscreen.
I’m sure the device is going to be “nice” but so was the Macbook Air for which there really didn’t turn out to be a market for. My other worry is that competition will mean we may not be able to get everything we want. I’d love to see Apple and Amazon work together on this.
Like many I’m eager to see the facts which will be out soon enough. I did want to share these pictures though. The TelePad is still a very nice little computer, kind of like the Motorola Razor of 10 years ago.
by Kris_Tuttle on January 25, 2010
For the past month we have been an active user of Jolicloud (www.jolicloud.com) which is a netbook OS that can most easily be described as an alternative to whatever the Google Chrome OS will be.
My Eee PC was just fine running XP but because Jolicloud can be installed in a separate bootable partition it’s easy to try. In this case a choice is offered at startup so it’s easy to switch to the other OS if you don’t like Jolicloud.
Installing the OS is simple and is completed with one very large (600MB) download and running the installation program. I found the overall interface and visual rendering to be very good although at first few applications are pre-installed.
This initial uncertainty was cleared away quickly once I discovered the application download pages where you can get all your favorites (Google Chrome, Facebook, Twitter, Skype, etc.) Installation was faster and easier than on XP. In this case the Jolicloud management layer made the user experience more consistent and it didn’t slow anything down.
After using the system for a month I can say that he system is very stable. I had no crashes or hard failures. In addition the overall interface and most actions are more suited to the limited screen real estate and functionality of a netbook.
When I say netbook I do really mean a small lightweight client for using cloud-based applications. I expect that the ability to control user actions and keep data and application content in the cloud makes this a more secure approach.
Jolicloud is the first real alternative to Google ChromeOS for netbooks and other mobile Internet devices. It’s a pleasure to use, is fast and stable. It’s too early to know how to what degree Google will link their ChromeOS to other Google software and services in terms of th user experience.
Jolicloud has the incentive to be open and would make a good partner for Adobe. Adobe has a suite of cloud-based applications that even have a UI that already looks like Jolicloud (or vice-versa.)
The rapid proliferation of cloud-based services and applications means that the capabilities of a Jolicloud netbook is expanding rapidly.
The only problem I had is that the system has some trouble explaining itself in terms of updates required and their installation.
Given the choice I tend to boot my netbook in Jolicloud unless I explicitly need to run a Microsoft program like IE or Excel which is only about 10% of the time.
For a new OS that’s pretty high praise in my book given that it’s early days. We’d recommend anyone with a netbook or even notebook to try it out.
As far as implications go I’d say it means even lower cost, more functional netbooks on offer for general use or tied with carrier data plans which will provide the device at no charge. If Jolicloud catches on it could be a threat to what Google is planning with ChromeOS.
by Kris_Tuttle on January 8, 2010
I say this mostly because of the Apple “iSlate” which is supposed to be announced later this month and ship in March. (Even if this isn’t true it might still have the same market freezing effect.)
At this point most of the other platforms have disclosed what they have to offer in the near term. The Google Nexus One is out. A bunch of new eReaders are all out. The Windows version of the tablet computer is out. There is a laundry list of new technology gadgets rolling out CES as we write that will include many new netbook and laptop option from basically every vendor.
But now it feels like we will enter the eye of the hurricane of mobile Internet for the next month or two as all eyes turn to Apple and the “iSlate” or whatever it will be called.
There is an obvious gap in the market that Apple may be able to exploit. The iPhone and similar devices are too small to be good choices for doing lots of reading on. As nice as an eReader might be it’s hard to justify a separate device for it. It certainly feels like a feature that should be built into a device that does more than just support reading.
Obviously many of us simply use our laptops for reading most online content but the form factor is not ideal for casual consumption in the living room, kitchen or the hammock. As reading online expands to represent a few hours a day it’s easier to justify a separate device for it. A tablet style device is perfect for many of these use cases but not if one has to navigate a typical OS environment to use it.
It would seem silly to buy an eReader in Q1. The same might be said regarding a new smart phone although buying a Droid, Nexus One or iPhone isn’t going to cause any acute pain or suffering.
Personally I think Apple might have a hit on their hands if they do the iSlate right. The most critical aspect will be how supported it is by players like Amazon. If Apple and Amazon can work together here it will be huge for both.
However if Apple comes out with a fantastic device but isolated from Amazon and most content then it’s not going to be very compelling.
I’m freezing my technology budget until April/May and then will make some new purchases for myself and the company.
The first quarter is always seasonally weak so it will be hard to tell what magnitude this may have in terms of near-term business trends. But if Apple successfully stalls the market in Q1 it could create some disappointments in Q1 and some opportunistic portfolio adjustments. We can only watch and be ready.
What are you going to do?
[Disclosure: Apple Computer is in the Research 2.0 model portfolio.]
by Kris_Tuttle on January 8, 2010
Back in September we wrote Is Google International Growth in Jeopardy? and today our fears came one step closer to being realized with the news that France is now seriously looking at a tax on the advertising revenue collected by companies like Google in France.
This isn’t as strange as it seems. The success of companies like Google means that foreign countries are in fact seeing billions of dollars of revenue effectively sucked out of their economy. Many of these countries, France included, see this situation becoming untenable. At the same time these governments are spending vastly increased sums of their own money on Internet infrastructure including broadband and content. If they are spending billions on these improvements only to see Google reap the reward without even paying a tax.
I think it’s highly likely that countries will impose a tax of some sort on this type of business activity. At least in the most extreme case for local advertising on www.google.fr for example. As long as the tax is reasonable it’s not going to be a disaster for Google but it will reduce their margins a little bit. The magnitude depends on the number of countries that decide to adopt such a stance.
These debates have been around for over a decade and started with the desire for states to tax sales of physical goods via online channels like Amazon.com. The problem today is that the numbers have become *much* larger. At the same time local economies are struggling and to some, albeit small, degree the loss of local revenue to global companies like Google is part of the reason. The truth is it’s more like salt in the wound created by the financial crisis, economic slowdown, high unemployment and lower property values.
It’s easy to decry government interference and avarice here but it’s not possible if at the same time everyone wants the government to subsidize “broadband for everyone” and other technology infrastructure improvements.
Google might think about taking a more constructive approach than companies like Microsoft, Oracle and Intel have in the past. Maybe a better solution would be to actually help countries like France instead of fighting them? For example the French government is ramping up a very large set of spending initiatives that will in fact help Google quite a bit. What if Google came forward with a contribution of expertise and some small revenue share to focus on developing the French online technology industry?
Google may or may not realize that this is closer to what Microsoft is doing in places like France and it’s effective. Google is powerful enough to lose some of these battles and it won’t necessarily impact the stock price in the short term. But at the same time it wouldn’t take a huge effort for Google to turn the situation in their favor or at least to neutralize what could be a stinging development if it is allowed to gather momentum.
[Disclosure: Google is part of the Research 2.0 model portfolio.]
by Kris_Tuttle on January 6, 2010
Investors have clearly been voting with their feet when it comes to the battle for the Mobile Internet between Apple and Research in Motion (RIM). This comes at a time when it’s become crystal clear to all (including them) that Microsoft desperately needs a strong play in mobile but is too far behind to catch up without a major acquisition.
Put simply RIM is suffering from negative investor sentiment. Not only is it coming from Apple in the form of the iPhone but also in the shape of software and services under the Android umbrella from Google. Motorola appears more competitive thanks to Android. To add insult to injury people are starting to take Nokia more seriously in the space based on more claims by senior management about what’s coming in the future. (This from a company who for the first 16 months of board-level reporting had grouped “smart phones” into the “design and fashion” category instead of full-featured data!)
Based on Intrinsic Value (IV) RIM is the most undervalued company in the mobile space right now. And that’s factoring in all the present investor fears of slowing growth and lower margins for the next few years, almost dialing in a worst-case scenario. We admit that it doesn’t make RIM “cheap” as an acquisition but it does begin to make it look reasonable and potentially non-dilutive for Microsoft to consider.
The fact is Microsoft *NEEDS* more than just a strategy and technology, they need a footprint. The choices are few but Microsoft is large enough to buy any of them including Nokia. But Microsoft doesn’t need to be in the cell phone business the need to be in the mobile Internet space which is the world of the iPhone, Blackberry and Android class of device. Palm has some good technology but doesn’t come with a footprint, especially in the enterprise. Motorola has too much baggage in non-phone businesses and what they do have is now based on Android.
Boiling it down to price is the hard part. On current numbers RIM is trading at a bit over 1x 2015 revenues. But the market will look at current revenues and there will have to be an acquisition premium of at least 20%. That would translate into a P/S ratio of around 4x and result in some near-term punishment for MSFT stock and investors focus in on near term dilution.
Strategically however this would be a masterful stroke for Microsoft. Almost no matter what Windows 7 Mobile looks like it will appear too late in the game to gather any meaningful share and attention. Mobile is too important to settle for that as the best outcome.
Of course RIM doesn’t need Microsoft to make their business work or for the stock to reach our IV estimates. But there is no question that the company needs to continue to execute well. RIM has advantages in both the enterprise and the consumer space that can be used to fend off Apple and Google but they are going to need to protect and extend these in order to win.
In addition we’d expect other large firms like HP and IBM are now appreciating the almost overwhelming importance of mobile and both companies know RIM well and would be able to acquire the company fairly easily.
[Disclosure: The Research 2.0 model portfolio has positions RIMM, AAPL and MOT.]
by Kris_Tuttle on December 28, 2009
The market has been acting much as our friends at GaveKal have discussed as prices have “melted up” here in Q4. Fundamentally prospects for better business momentum in 2010 are good and valuations on many stocks we follow still offer reasonable upside.
As we enter the final few days I expect self-interest among many investment managers will push prices toward the best possible “market to market” at the close on December 31st. With volume light it will be easier to lift prices with concerted buying than usual. 2009 returns should allow many investment managers to post a strong annual return and pocket nice performance-based fees for the first time in a while. It’s also an ideal time to be getting a cash performance bonus as many popular asset classes like real estate are attractive if you have cash.
However after December 31st the motivation for pushing prices higher to maximize current compensation will evaporate and be replaced with speculation about Q4 reports and 2010 guidance updates later in the month. If true it argues for a little pull-back in prices with the first trading day in 2010 and into January depending on likely guidance versus expectations for 2010. (R2 will compile and publish our spreadsheet on that by mid-month.)
On the flip side tax-loss selling also applies to the few names that have lost a great deal of value in 2009, especially given the triple digit gains in so many stocks. In some cases this will push share prices down to levels where I’d add or own shares for a bounce in January.
I’d never pretend to know what the market is going to do in the short term but starting with a scenario helps to manage positions and exposure of a long-term portfolio.
No matter what happens in the last week I think Champagne sales will be healthier this year than last…
by Kris_Tuttle on December 17, 2009
The news is simple, in a rush to raise capital and reduce government control (to pay higher compensation) Citibank priced an offering “in the hole” as they say and in the process spooked the treasury out of selling their 34% stake.
We’ve seen most of the informed commentary that suggest the entire episode was “pathetic” and bad for stockholders. Although the transaction process was a mess (isn’t that one of their core businesses?) it’s not the big story.
The fact is the massive Treasury stake is now a major overhang and they have basically said that they are ready to sell but at a slightly higher price than the recent deal. In other words you have a monster seller sitting above the stock waiting for a price.
Now it’s possible that results will continue to improve at Citi and eventually there will be enough demand to “clear out” the supply but we are talking about one hell of a large supply of stock.
There could be some interesting trades here knowing all this. For example selling calls above where the Treasury would want out could be a safe bet given the right options strategy. (See related post on options as a strategic investment.)
[Disclosure: We have no position in Citi.]
by Kris_Tuttle on December 17, 2009
The last couple of months have been marked by a broad set of positive developments for the GPU makers, especially Nvidia and AMD. Some of the highlights have been:
Application acceleration goes mainstream. – The leading creative application providers, Adobe and Autodesk, are embracing the GPU and driving the requirement for one into space of generalized computing. This actually started with prior generations of the software but we’ll see more of this in products like Adobe Creative Suite Version 5 but even Flash will take advantage of the GPU to improve performance and the experience.
Internet video gets serious. – Video is one of the leading new applications for the Internet today and it is shifting from the short grainy YouTube content of yesterday to high definition, in some cases even 3D, content. This level of digital video demands more processing power to produce and even to view properly. Everybody want’s video, more so than even text and browsing, and it’s another good reason to have a GPU in computer, especially mobile Internet devices.
GPU in the cloud. – Until recently it wasn’t clear if GPU computing power would be available in the cloud. Given the success of generic on-demand offerings from Amazon, Google and others it seemed only matter of time before we would begin to see it. Both AMD and Nvidia are working closely with the major players and we will see GPU processors on-demand and in the cloud pervasively in 2010.
Cloud-based GPU applications are shipping. – Mental Images has announced and is providing Reality Server which represents the high end of digital image rendering in the cloud. Some companies are using it today with their own cloud servers. Application platforms like OTOY are enabling the highest end of gaming even on mobile devices like the iPhone using cloud-based GPU software and acceleration. Here is a link to a Techcrunch post on OTOY back in June of 2009. We also covered a demonstration of OTOY in our short research report on the 2009 Gilder Telecosm Conference. It’s available in the sample publications section of our website.
3D content has arrived. – The cinema industry has embraced it. Avatar is in theaters this week. A big difference today is that the cinema industry creates content in native digital form which means that content can be moved rather than redeveloped into other formats for games, short videos, images and other forms of consumer entertainment content.
Standards are emerging. – Although there is still plenty of bickering over PhysX versus OpenCL and DirectX versus others, these technologies are settling into mainstream software like applications, browsers, and operating systems. In cases were two important standards make it, it looks like they will both be supported. This makes it possible to deliver high-end graphics and 3D applications to a large market.
We expanded on the mobile 3D theme further in a report published yesterday by GigaOM called: 3-D Untethered: A Look at Mobile 3-D Technology (GigaOM Subscription).
On top of all the industry adoption Intel settled with AMD and paid them $1.25B, scrapped their Larrabee-based plans to enter the discrete GPU market and is under further FTC investigation for trying to screw Nvidia.
Put simply the industry is shifting to video, 3D, and mobile and right now this leaves Intel mostly out of the action. It’s great news for Nvidia, AMD, ARM, Imagination Technology, Qualcomm and a host of other semiconductor makers.
When it rains, it pours.
[Disclosure: The Research 2.0 model portfolio has positions in both Nvidia and Qualcomm.]