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 October 2, 2009
Nvidia stock has been quite a roller coaster this year since we published our original research report on January 29th. At the time we noted that the growth in 1) mobile computing, 2) visualization and 3) higher end processing all fed directly into the growth prospects for Nvidia.
Since then we have seen the company continually expand their market share in these segments though design wins, product launches and new offerings. As we noted Intel has yet to show up at the party and when they do they will have the wrong product. AMD/ATI has done well and some niche firms like Imagination Technologies (LSE: IMG) are in a very good position. However Nvidia remains the company best positioned in these three markets.
Recently the company got closer to Microsoft in several areas including the Zune and linking resources to allow Nvidia processors to accelerate Microsoft products in the same way Nvidia is doing that for other software providers like Apple and Adobe. During their recent GPU conference they unveiled their next generation GPU which is quite impressive. However there is too much attention paid to the the high-end today and not enough to the mobile and embedded spaces which is where the real growth opportunity exists. In a few years people will ask “What’s a video card?” Don’t be surprised.
Over the course of the year the stock moved up to our initial intrinsic value (IV) estimate of $15 and we published an update in early September which also “rolled forward” our IV to $17 as it is now close to the end of the year.
Recently the stock has been downgraded by JP Morgan who cited risks to long-term estimates from increased competition and potential legal battles with Intel. On the estimate side current consensus for revenues calls for an increase of 14% YoY to $3.58B. That’s higher than the 9.2% for Intel but more inline with the likes of Qualcomm (13%), Broadcom (16%), Marvell (16%) and OmniVision (15%). What we conclude from these figures is that Nvidia and also these other companies probably need a reasonable economy next year to exceed their current estimates. Inventory is still quite low and we get some very easy comps the next two quarters so the risk to estimates will be greater on the back end of the year.
Earnings are a bit harder to figure for next year because there is huge leverage on the gross and operating margin lines. Small improvements have a fairly large impact on earnings. Current consensus calls for $0.64 on the out-year which is up 3x over a depressed figure for this year. In our IV model it doesn’t much matter if NVDA reports 35c or 65c next year but obviously it will impact the stock, at least in the short term. In our view the more volatility for NVDA the better since by adjusting portfolio weightings one can capture much greater returns than the simple stock move. The shares are up 71% YTD but the 30% dip in May gave us a chance to go very overweight, further enhancing returns. With the shares down just over 16% from their recent peak we may not be at a major overweight yet but we are scaling up a bit into weakness.
As we’ve said before the only thing we really don’t like about NVDA is the heavy selling by the CEO and the fact they he has stated that he doesn’t see a big opportunity for Nvidia in the enterprise. We know he’s wrong on the latter point. His selling has been regular and plan-based but it’s the type of thing that bothers just a bit.
Our historical published research on Nvidia is freely available on our website after registration is approved.
[Disclosure: Research 2.0 has a net long position in both Nvidia and Imagination Technologies at the time of this writing.]
by Kris_Tuttle on May 5, 2009
At first we viewed the Oracle acquisition of Sun as a purely defensive move with the value being more in IBM not having it than Oracle enjoying it.
However now it appears that Oracle is coming around to addressing the SaaS market more directly (over their own strenuous objections from the recent past.) Some elements of Sun could provide Oracle with a “lite” stack that could be used as a full and viable SaaS solution (unlike Netsuite) that *might* not be as much of a threat to the core Oracle software business.
So far SAP has failed miserably in this space thanks to their profound over-engineering of what is supposed to be a lightweight and easy alternative to the “poured concrete” foundation of SAP software. This gives Oracle a window of opportunity to at least not be “worst and last” in the space.
We expect Oracle to do far less with the core assets of Sun than Oracle management has promised. A reasonable “failure strategy” may end up being to use most of the remaining Sun assets inside a SaaS-focused business entity.
From an investment standpoint the move into SaaS by Oracle is a classic good news/bad news situation. While a nice strategic move it will be a difficult transition in terms of revenue growth and margins. Although recurring revenues from SaaS models can justify higher valuation multiples, they deliver fewer dollars up-front and lower initial profit margins. Any meaningful transition for Oracle would create substantial pressure on revenue growth and margins. (This is probably the primary reason Larry Ellison dislikes this model so much.)
Oracle would seem to have little choice. Salesforce.com has continued to be successful in creating and growing the market while platform technology providers like Microsoft and IBM are moving (perhaps with a few kicks and screams) to embrace the SaaS/Cloud model. Even the mighty Oracle can’t afford to face down all competition. These vendors have credible solutions and distribution channels and if they are waving a small monthly fee over a large Oracle proposal, many customers may opt for it.
Thusfar most analysts have cheered the Oracle purchase of Sun and expect it to generate additional earnings for shareholders. We think they are at least wrong in magnitude and may even have the direction wrong depending on how things evolve at Sun. Secondly the transition to SaaS will be a strategic improvement in Oracle positioning and may threaten other vendors, but it won’t be good news for Oracle shareholders in the short and medium term.
Pressure on revenue growth and declining margins are rarely good for a growth stock, we don’t think they will be good for Oracle.
[Disclosure: Research 2.0 has a short position in Oracle at the time of this writing.]
by Kris_Tuttle on April 3, 2009
We didn’t make it. (But we did amplify it here on February 24th.)
The points made by GaveKal in February for technology shares leading the market were indeed compelling and the past month of market action has been nothing short of spectacular.
Technology companies are cash-rich as a group, offer a cheap call option on global growth, are taking an increasing share of consumer spending and used to operating in tough environments where lower prices (and costs) are part of doing business.
Combined with the fact that technology stocks were at very low valuations in Feburary it was easy to get “long and strong” the sector.
At this point it’s tempting to take the chips and go home. But most of the names we follow are still below our estimates of fair value so while it makes sense to adjust positions it doesn’t feel like this trend is over. Given that we are so focused on technology we try extra hard to be objective.
We were astonished to read articles like this Why Tech Stocks Won’t Lead The Next Bull Market. These guys are about 10 years behind the curve because the focus on names like Microsoft, Oracle, Yahoo and GE as the “leadership names.” What? People like this should be given a one-way Internet connection! 
These stocks may have to take a breather but most of the ones we look at still look attractive on a fundamental basis.
[Disclosure: Research 2.0 is long many technology stocks.]