It’s no secret that the GPU space has been heating up.  The Apple/Nvidia deal got the ball rolling and now Intel, Nvidia and AMD/ATI are in a fight to lock up design wins in the next generation (or two) of devices. 

A few things are driving this including:

1. More graphics processing needed in mobile Internet devices.  Video and graphics are more important than crunching spreadsheets.
2. Interfaces are becoming more complex.  It’s been on the roadmap for 20 years or so but more game-like UI features will dominate the client going forward.  Much as basic windowing systems took over back in the late 1980′s and 1990′s. 
3. Software libraries have made it easier to take advantage of the GPU for some more general purpose processing. This is both a top-down and bottom-up movement.  The GPGPU idea is here to stay.

That Intel may be in the PS4 (if there is such a thing) could happen.  The new Intel chip is positioned at the high end but most of the units, and possibly profits will be in the low to mid-range where Nvidia (with Tesla and Tegra) appears to be in a good position.

Nvidia as a company and the NVDA stock are in the midst of a huge transition from high-end, expensive add-in cards to chipsets and mobile solutions.    We expect Nvidia to emerge as a leader in this category. It won’t come without any bumps although guidance already reflects a fairly steep falloff in their traditional business.

Our fairly conservative estimate for fair or "intrinsic value" comes to $15 which makes the stock attractive at these levels.  Full details can be found in our recently published 5 page client report ($pdf) discussing the changing client architecture with implications for Intel, ARM and Nvidia. 

[Disclosure: Research 2.0 has a long position in NVDA and ARM at the time of this writing.]

There will be plenty of digital ink spilled today on Carol Bartz taking over at Yahoo.  With no apologies we offer our own 2c.  We did spend some time at the company last year which makes us feel like we have some insight even though we are far from experts on the company.

Lots of damage has been done over at Yahoo over the last few years.  It’s well known that many of the best people have moved on.  In short, Yahoo is a mess.  But then again isn’t that what many investors want? 

That the stock wiggled down yesterday is hardly any credible indication of how good the potential fit will turn out to be.  Many cited the fact that Bartz has no "Web 2.0 or deal making" chops to help Yahoo succeed.  What Yahoo needs first of all is adult supervision and some common sense decision making at the top to begin to restore a sense of coherence and possibly hope after the Semel destruction.  Our guess about near-term stock weakness is that the appointment signals that the company won’t be sold in the very near term, a blow for speculators.

What’s required over the next 12-18 months is simple enough that Bartz will probably implement the changes and pull them off.  We’re talking about management 101 here.  Establish a framework, measure results, reward performance.  [Believe it or not none of this exists now in terms of decision making at Yahoo.]  That alone can have a dramatic positive effect on how the company operates and is viewed.

The other side of the coin is simply focusing investments and execution on where Yahoo can get returns and build advantage.  Some of these may be tough choices but many will be easy.  By divesting and focusing their efforts we’d expect Yahoo to improve their poor ROIC and margins over time.

In thinking about this in terms of "expectations investing" the risk/reward on Yahoo seems at least interesting.  We don’t know Carol Bartz personally.  If she is another Ellen Hancock (Exodus) or Meg Whitman then Yahoo is toast but if her basic management skills are real the stock could easily revisit the 20′s again.  Well short of the $33 Microsoft offer but not bad from current trading levels of $12.

We would expect Bartz and the team to be strongly tempted to take one last whack at lowering expectations since it’s their last penalty-free opportunity.  Having over $3B in cash gives Yahoo some power to shift things around and make acquisitions once they figure out what strategy elements to focus on. 

There are hardly any shares sold short (36M out of 1.4B shares) so if the shares appreciate short-sellers could tend to increase supply of the stock.  However the ability of Yahoo to make deals may keep short-sellers at bay.

If the company comes out with a strategy that is better than a 90 day "listening tour" we will take the time to run our intrinsic value analysis to further pin down the potential upside for the shares.

[At the time of this writing we have no stock position of any kind in YHOO.]

I guess it’s pretty clear the shorts were not paying much attention to ongoing developments at Palm in the last month or so.  Going into December there were about 38 million shares short out of a float of about 110 million.

When Palm got a fresh injection from Elevation Partners that started the ball rolling and their stellar display of new technology and strategy at CES yesterday, especially in the absence of other interesting news from the Steve-less Macworld and humdrum CES.

Most fundamental analysis would say the stock is a little ahead of itself right now at $6.50 but the volume so far suggests there are still lots of shares sold short.  Our long-term analysis suggests an intrinsic value of $11 based on a successful execution of the turnaround.  So despite all the near-term momentum there isn’t a strong enough reason to sell shares at these prices, at least not yet.

Shorts will certainly point to there still be "lots for Palm to prove" and the next couple of quarters are going to be ugly based on reported results.  However if investors are willing to "look through" the negative short-term data points the shorts may not get the relief they are hoping for.

We agree that there are still plenty of risks for Palm and have included more detail in our published note scheduled for release on Monday.

Stream of consciousness from the Palm call….full transcript is available here.

[This GAAP/non-GAAP thing is a huge useless pain for everyone.  Takes tons of time an does nothing but obfuscate.]

Smartphone business not too bad.  Handhelds obviously down the drain but now pretty small.

Gross margins down 6pts sequentially! No expansion likely in Q3.

Operating expenses are coming down nicely, should hit low-mid $90M range soon.

Non-GAAP loss of $80M and Adjusted EBITDA loss of $55M.  (What large NOL carryforwards you have grandma!)

Cash at $224M, inventory, and A/R all okay.

Sounds like this is close to the bottom for the company with the February quarter offering the most likley bottom IF the new product strategy works starting in fiscal Q4.

It’s tough out there. Maturing product line, consumer spending tough, spending on new products adding to expenses but not yet ramping.  Translates into a "few rough months ahead."

New platform is nearing completion and first phone will launch in the first half of 09 as planned. Believes it will "stand out" in the marketplace. 

For now Treo Pro continues to do okay, rolling out to new markets.  Thinks their ability to control software and hardware will help them long-term in the market.  Claims carriers are excited. [Could be an interesting alternative for carriers.]

Smartphones will continue to be gaining share as it is still early days here.  [We agree.]

Q&A starts…

Sell in and sell through mostly balanced.  Some inventory write-downs should put component WIP in line.  Cash burn will be UP in the next quarter.

Some discussion of it being "too late" for a new phone platform.  [We agree with management that is still early in the game.]

Treo Pro still plugs away in the current quarter and will roll out at a major US carrier this Q as well. All in front of the new product launch.

Company has auction rate securities but there is zero liquidity in the market right now.

[Conference call drinking game for the holidays? -  "challenged environment" or "challenging environment."]

[Pretty good live coverage by the major Street analysts on the call. Clearly they are interested in catching a potential turn at Palm if one materializes.  That's a plus.]

They are going to be aggressive at marketing and promotion for the new products and be heavily discounting older products so margins will be under pressure.  So Centros are going to be getting very cheap while the Treo Pro ramps and they work on the new platform.

Management states they will return to profitability in 2010 but mum on when exactly. Long term gross margin goal is between 33% and 36%. 

Won’t get into what features might differentiate the new Palm offering.  Is it graphics, keyboards, applications? No light shed on it.  Maintains goal of having "the most compelling platform and product on the market."  Hard to believe but they are aiming high anyway.

By Q4 of F09 their OpEx goal is mid-to-low 90M run rate.  Company has $224M in cash and will manage all cash expenses very carefully in the Q.  Claims they could raise additional cash if they needed to but that would only be to further drive initiatives rather than dig a deeper hole.

One last comment that Windows Mobile will continue to be their platform of choice for enteprise applications is interesting.  Does it imply that all the new stuff coming will be consumer only and that they will need to continue to invest heavily in Windows Mobile?  Will a Palm device work on both platforms or are we talking full separation here.

It’s going to be a volatile story the next few months.  Clearly the new platform is a major turning point and with the number of moving parts the stock may not appeal to most.  But with a market cap of $240M, $224M in cash and $400M in run rate revenues it’s an interesting stock.  With listed options the stock can be used like a non-expiring call option to implement some strategies.

[Disclosure: We have a small position in PALM at the time of this writing.]

While we were busy doing a little real work on Palm we noted the change in management at Alcatel with a little bit of interest.  Alcatel doesn’t fit into our research themes very well as it’s basically a giant telco conglomerate at this point but we’ve had some very profitable history with such ugly companies in the past.  (Unisys and Sterling Software both come to mind, very boring to our clients but we find 200-300% returns in fairly large stocks interesting enough in their own way.)

Alcatel is a beast with something in the range of an $18B run rate and around $1.5B in EBITDA generation per year.  As a conglomerate it’s everywhere but without much of a unifying strategy or operating plan.  The company has a long history of volatile growth and margins.  Operating margins over the last 14 years have been more negative than positive with the peak being 11% back in 1998.  It’s probably fair to say the company has not made money on a cumulative basis in the last decade or two.   The ability for the company to come up with a plan that will create some sustainable improvements in operating margin is unknown at this point.  The scale of the problems doesn’t seem to be addressed by a simple management change at the top. 

Still investors love a company with lots of "fat" to trim.  It’s worked wonders for IBM and HP in the past.  But of course for Alcatel the markets and situation is a bit more complicated.  But Alcatel has been improving the mix of business to be more services and enterprise (about 1/3 of the total now) that at least have double digit operating margins.  If management can drive these forward while rationalizing the massive overhead and corporate cost structure investors would get interested.

However when we do a little back of the envelope figuring on potential share price gains it dampens our enthusiasm.  If the company can get to a 5% operating margin the EPS is something like 40c/share the shares already reflect a 15x multiple of that.  It just means we probably have to wait until we get some cues from management as to what they plan and then spend a little more time with the business model to see how far they might be able to go. 

Meanwhile we think we have more reason to keep working on PALM.

We highlighted Data Domain (DDUP) in a prior post a bit over a week ago as being exceptionally timely given the excellent data we were getting through our research sources and the market-driven pull-back in the stock to levels that provides some meaningful upside to our $24 IV estimate.

The stock has held up well during this time and into the earnings last night which reflected strong execution and allowed the company to raise guidance for the year.  The company continues to post powerful growth of over 100%.

We reminded our clients in a recent research report that data de-duplication is the top spending category in enterprise storage but the shares were too expensive at the time to get excited about.

Our IV model has been tweaked a bit post the quarter but doesn’t change our IV number much. We think that our $24 could go up by a couple of dollars but if the stock rallies post quarter we would probably take some profit.

Anywhere below $21 we’d probably get aggressive again assuming our research inputs remain intact.

Tags: Data Domain, DDUP

With the Yahoo festival seemingly winding down or at least bringing us all to the point of fatigue we have started to wonder if eBay is next.

The stock has been a disaster these last five years with the shares down 20% during the period and off over 50% from their highs of $58 back at the end of 2004.

We all know that management has done little to organize the company for success. Acquisitions have helped the company but not enough to boost the stock.  It’s possible that some of them are just about ready to help overcome what seems to be a fairly rotten core business in terms of growth. 

The situation seems ripe for the antics of the slippery slimy types to come in under the auspices of creating shareholder value.  This one seeks too tempting below $30 to be left alone.

Tags: ebay

There is an increasing number of discussions and recommendations about being short or long oil.  A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction.  At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.

To be up-front we are long DUG which is a leveraged short on a number of oil and gas related stocks.  A fair number of people have come out and questioned this as an "investment."   In the short-term of course it is not.  Nobody can be right in the short-term without inside information or luck.  (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.)  But if one is looking out a few years and running a diversified portfolio vehicles like DUG and others can come in very handy.

First of all they are a hedge.  If you don’t have something to hedge against falling oil prices then don’t pretend this is a reason to be involved.  We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure.  These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.

However if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on.  By being short "old" energy and long "new" energy we can insulate a bit during short-term swings.

Long-term we do think that being short oil here is an investment.  There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different.  It’s beyond the scope of a blog post but those interested should certainly pick a copy of The Ultimate Resource by Julian Simon.     We also don’t yet publish much of our energy work to individuals but for now can highly recommend the work that Tom Konrad the team  does over at altenergystocks.com.

Tags: Energy, DUG, DIG, USO, OIL

We’ve been following Data Domain for over a year and it has tended to be too expensive to buy.  Our intrinsic value (IV) estimate has been fairly consistent at $24/share but recent inputs suggest the company may be able to do well enough for us to tweak our model higher and see an IV in the upper-$20′s.

The recent market turmoil has reduced the price to just over $20 which makes this a strong candidate for boosting overall 2008 returns. The shares could easily finish the year up 20% from here.

Our inputs underscore the competitive lead that Data Domain enjoys in the marketplace.  The major competitors like EMC are still over a year behind.  In addition it has proven out to be much more difficult to switch deduplication vendors than most people originally thought, enhancing lock-in.

We published an updated report entitled "Data Domain One Year Later ($)" with more information and to serve as a follow-up from our initial report published when they did their IPO in 2007.  Subscribers received the report in June when DDUP was trading higher meaning there wasn’t a strong stock call at the time.

However at current prices our clients should be more aggressive. The report is also available for purchase at the link above for those wanting more details.

Institutional investors are mostly not tuned into the Google zeitgeist even though they own major positions.  As possibly the most over-followed company on the planet Google investors will hear about every little ripple of information.

The weirdness stems from the Google culture where engineers can spend time doing pet projects and see the show up as offerings in Google Labs or even as "beta" products in the Google portfolio.

When Google comes out with something like Lively it gets looked at and generates not only puzzled looks but some concerned questions of whether Google has "lost its way."  The fact is that Google throws quiet a bit at the wall to see if it sticks.  Plenty doesn’t make the cut but none (or very very few) are like Microsoft Vista or Adobe Creative Suite.  For Google and other SaaS styled companies it’s not about product cycles.  New products, particularly strategic ones do have a role to play and bear watching closely.

The problem is that many mainstream investors have a hard time sorting out the important aspects of what’s going on at Google from the unimportant ones.  Offsetting the difficulty in separating the wheat from the chaff is a blissfully short memory that generally means any Google weak launches or eventual failures are forgotten quickly.

Google remains an essential portfolio holding as they are perhaps the best technology architecture for modern computing although they occasionally put out some stinkers.  (Requires Windows XP and Internet Explorer?!)

Developing a good feel for Google as an investment requires an ability to make more "doesn’t matter" decisions than we have seen with any technology company in the past.