Cinedigm reported its Q3 Fiscal 2011 quarter ended December 31, 2010 this morning. The numbers were pretty much all as expected. The press release has all the specific details. In summary, they reported just over $21M in revenues (up 7% YoY), $12.9M Adjusted EBITDA and a large GAAP loss, owing to major depreciation and interest expense.

Operationally, Cinedigm completed 604 new “Phase II” digital deployments and added 614 to its backlog. (So a book to bill of just over 1, for those who think about it in those terms.) Cinedigm has over 1270 screens in backlog, so even if book to bill fell below 1 for a quarter or two, it wouldn’t make a difference. However, they are working on closing the few thousand more screens to bring them under agreement and add to backlog.

There were clearly signs that “the real story”, as we see it for Cinedigm, is beginning to unfold. Specifically, they announced that they have signed a deal with some partners in India to bring their technology and services platform to that country. Details won’t be available until they can put out a full press release and have it approved by their partners, but it’s significant because it will increase the recognition of Cinedigm as a technology provider and not as a financing company. This is a key transition for the company, and while this deal alone may or may not be a catalyst for a change in the mainstream view, it’s likely to help.

Secondly, this was the first call with the new CEO, Chris McGurk. To his credit, he stepped up to the plate on the call and didn’t hover in the background, which is what some newcomers do on their first call. McGurk made it clear he’s serious about alternative content, even though most are quite skeptical. On his side of the ledger, though, is a good deal of experience and a large network of relationships to leverage in order to revisit the alternative content model more completely and as a real business. How well they address alternative content and new business models is the next next chapter for the company, so a good strategy now is important.

Cinedigm became a research client of ours a few months ago, and we have published a few posts (listed below) on them already, as we complete our research for a full report. The digital entertainment space is undergoing a major overhaul, and we see Cinedigm as a key player in this area that will emerge over time as more of a technology, service and content provider in this transition.

[Disclosures: Cinedigm is a corporate research client of Research 2.0, and some Research 2.0 employees may own positions in the stock at the time of this writing (positions that were owned prior to engaging with Cinedigm). Additional information about our disclosures and policies can be found on our website on the legal page.]

Related articles

• Is it time for Cinedigm? (research2zero.com)
• Cinedigm Expands the Team (research2zero.com)

Tesla stock is off to the races today with a very successful IPO. An expanded number of 13 million shares were priced above the range at $17 last night.

Of course we have seen this race before – quite recently, with A123 Systems (AONE – $9.82), which traded into the low-$20′s before eventually falling back to their Intrinsic Value of about $9 share. Going back a bit we had the same experience with Netsuite (N – $13.44) which traded up to $40 immediately after their IPO (which enjoyed an increased size and filing range too) before trading down to Intrinsic Value a year later. (We’ve added links below to some of these reports if anyone is interested in them.)

In terms of raising money, the Tesla team has to be pleased with the size and pricing of the deal. It’s a great achievement for the investment banking and management team to get this result for a company at such an inflection point, not to mention two years away from generating any fundamental investment value for equity holders.

So from here we turn to our Intrinsic Value estimates for Tesla. Not surprisingly, there is no value there today if one looks out 5 years. However, on a longer-term view there is opportunity for appreciation, particularly in 2012 and 2013 when both production and IV can begin to ramp based on results the company can achieve in 2017 and beyond. We’ve included two IV scenarios for Tesla here for our readers.

We did publish our own report on Tesla over at SharesPost, where there are also a few others to peruse. There are also several good write-ups out there already that can help investors figure out how they may want to participate in this developing space. Here are a few:

Greentech: Tesla IPO – Gentlemen Start your Drivetrains

Why Tesla is Unlikely to Succeed

Although a good deal of the articles and reports on Tesla and the EV industry are skeptical (to put it mildly), there is a major variable that is impossible to quantify at this stage – which is the consumer.

First of all, an EV is great fun to drive. Whether it’s a Tesla or other brand they can be fast and silent which is a real thrill. Electric technology is likely to result in superior vehicles because of the innovation and flexibility that will be possible now in auto drivetrains.

Secondly, the aspect of getting away from gasoline and oil may be a more powerful incentive than many investment professionals realize. Between the ongoing wars in the Middle East, potential global environmental threats, and the Gulf oil spill, people may feel an emotional pull towards EVs that may help make the market develop faster than many anticipate.

The point is that it’s simply too early to pretend that we can really pin down what the broad market will look like and how Tesla will be positioned in 2015. However, we do know that the IV for Tesla will be below the current price for at least the next year. Even using a very aggressive case for the market and company development, the IV ramps only in 2012 and 2013.

Past Research on NetSuite and A123 Systems:

NetSuite IPO Preview.pdf

A123 Update Final Package June 7 2010.pdf

Disclosure: No positions in the shares of the companies mentioned in this post.

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.]

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.]

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.]

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.]

Shares of Apollo Group (NASDAQ: APOL – $66.88) are down over 14% today after their quarterly report last night.  We don’t follow the stock from a research standpoint but have taken an interest in the share price in the last few months as it has defied market gravity.

Most of the analyst reports we have seen so far are defending the shares here and see the concerns fueling the sell-off as overblown.  However the stock decline merely reflects a moderation of what have been near-perfect conditions for Apollo during the last few quarters.  Analysts tend to straight-line these trends into unrealistic expectations. Management outlined very sensible business plans going forward but they may produce less than historic upside and margin expansion.

Apollo has been blessed with rising prices and decreasing costs to put the wind at their back and create a string of solid execution and strong quarters.  Now there are some very minor blemishes in the future vision as 1) government programs are shifted to direct-to-student lending, 2) Apollo will be getting a bit more scrutiny from regulators, 3) the company says they will be making some investments to improve their technology and programs and while not yet evident in results per-se, 4) there are some signs that the economy is having a minor impact on Apollo.

So what does one do with Apollo here?  The simple view is that the price of the shares now looks fair at 16-17x current estimates.  The complicating factor is that most analysts that follow the stock continue to somewhat stubbornly defend it and some are (perversely) still raising forward estimates on the stock.  (Note to sell-side analysts: If you like a stock you want to keep estimates low and if you hate a stock you keep your estimates high.  It goes against peer pressure and conventional wisdom but that’s how it works.  You do your work with unpublished numbers and commentary.)

Before the report we saw some models that were suggesting a fairly strong accelerating in top-line growth.  It’s too soon to tell how things will settle out with consensus as we’ve only seen a few reports so far.  But the ones we saw are raising earnings estimates for the current year and the out year.

Based on what we know now it’s hard to imagine the company will make new 52-week highs this year.  So that suggests to us a stock that’s range-bound in the $75-55 band.  It’s a wide one but well within the 52-week high/low on the shares. The reason we think another 10 points of downside exists from here is that the company may transition into a “meets expectations” from a “beat and raise” sort of momentum stock.  That will attract a different type of investor at more GARP (growth at a reasonable price) style valuations.  The company also has $500M authorized for stock repurchasing so that could be a factor in the market at some point.

From a short perspective the home run possibility is that there is a major “hiccup” in the transition to direct-to-student loans which is a major shift.  Apollo certainly can navigate it without a hitch but as everyone knows any change brings some risks along with rewards.

Despite all the efforts of management we still feel that Phoenix retains the cloud of a “mail order degree” during a time when degrees of any sort (even Harvard) seem to matter less.

We think that future recruiting is more “show me what you can do” and less  “show me what you know.”  Not something we would make a stock call from but a trend that argues against taking on loans to get a piece of paper versus alternatives.

[Disclosure: Research 2.0 has a small short position in APOL.]