Marvell (MRVL) management, employees and long-term investors were probably shocked by the huge drop in the stock price yesterday, the day following release of Q3 data (really fiscal Q3 2008, the 3 months ending October 27, 2007). While there are specific reasons that make a valuation of Marvell's stock widely open to interpretation, for the most part the drop reflects Wall Street trading program and analyst focus on short-term profits being mismatched with Marvell's strategy for long term growth.
I'm assuming you've have some background on Marvell Technology, which I've followed for a number of years and which I own stock in. If not you might want to check the following before reading further:
my Marvell page at Openicon (which has links to my prior articles on Marvell and to my summaries of Marvell analyst conferences).
www.marvell.com
No one is disputing, now, that Marvell is able to grow very quickly, both growing its interal divisions and by making strategic acquisitions. Q3 revenues were $758.2 million, up 15% sequentially and 46% from the year-earlier quarter. They were also well above guidance management gave at the beginning of the quarter. That is exceptionally fast growth for a company of Marvell's size. But it is just getting back to trend for Marvell. Here are annual revenue figures for the past few years:
2002 $505 million
2003 $819 million
2004 $1,224 million
2005 $1,670 million
2006 $2,238 million
The current annual run rate is $3,032 million. Call that $3 billion. Six times 2002 revenues.
But where's the beef? Using GAAP Marvell lost $6.4 million in Q3. And I like to use GAAP. On the other hand I like companies that make short-term sacrifices in order to be able to dominate an industry in the long run. The semiconductor chip industry is very diverse. What Marvell has done successfully is pick an area, become dominant, then pick a new area (or two or three) to compete in. Marvell always starts at the high end of the markets it chooses, introducing revolutionary technologies. Then it gains market share as these technologies spread to the middle market and then to the low-priced market segment.
Wall Street is mad because Marvell invests a lot of money in research. Not me. This investment is going to bear fruit.
Unless we enter a global recession 2008 is going to be a year of good profitability, on top of continued revenue growth, for Marvell. Here's why.
First, the profit figure is not as bad as the GAAP figure indicates. Marvell also released a non-GAAP figure, which was a Q3 profit of $86.2 million. This figure eliminates (from the GAAP numbers) $37 million in amortization expense and $56 million in stock-based compensation expense, which is a non-cash expense.
Well, GAAP requires stock-based compensation to have a $ equivalent because it dilutes shares. It is non-cash, and I believe in giving employees a stake in the company. The amortization expense is real too.
Keeping that firmly in mind, nevertheless on a cash basis Marvell was up $33 million. So they are cash flow positive. They also increased inventories in line with business to the tune of $85 million.
Going forward, Marvell announced a decrease in headcount of 400 workers or 7% of the workforce. In Q4 there will be a $8 million one time charge and about $4 million of benefit. In Q1 benefit shoud rise to around $10 million.
In addition, revenues (which are somewhat seasonal in semiconductors) should rise at least $30 million in Q4, which was management guidance. With operating expense being held nearly flat, and cost of goods sold should increase less than $15 million, a good guess is that net income will icnrease by about $15 million.
So at very least I expect GAAP net income to be in the black in Q4, with rapid acceleration upward after that.
There are a number of other factors that should accelerate profit growth. One is that the former-Intel application (cell phone) processor division's costs are set to go down as Marvell will no longer have to buy the processors from Intel at contracted prices. Instead they will be made in an Asian fab, which has already made sample chips and will be gearing up in 2008.
Marvell Technology has also had a large number of design wins that are going to ramp up revenue in 2008. They have introduced advanced video processing chips that will go into an increasing number of flat panel displays. They also announced breakthroughs in a Green technology for analog power supplies that are the result of 5 years of research and development.
Marvell could please the nearsighted wage-slave analysts of Wall Street by drastically cutting back on research and development ($252 million in Q3) and just marketing the hell out of the technologies they already have. Short-term traders would love that. But with a $3 billion revenue run rate, $1 billion a year in R&D begins to look reasonable. If Marvell cuts back R&D slightly and hits a $4 billion a year revenue run rate by the end of 2008, everyone will be heaping praise on CEO Sehat Sutardia and his team for their wisdom and perseverance.
All stocks are risky. At $15 a share today, I don't think Marvell has much risk left in it, aside from macroeconomic risk, but always diversify your portfolio and remember, if you don't buy low you can't sell high.
Thursday, November 29, 2007
Saturday, November 24, 2007
Celgene (CELG) and Pharmion (PHRM)
I own Celgene (CELG) stock, so naturally I am wanting to know whether the Pharmion (PHRM) acquisition will be a good thing. The rational question to ask is: would I buy Pharmion at its price prior to the Celgene offer, and would I buy it at the agreed price of $2.9 billion ($72 per share) if I were running Celgene. Truth be told, I have never paid any attention to Pharmion in the past.
In October Pharmion, which has just under 37 million shares outstanding, was running mostly between $45 and $50 per share, so its market capitalization was roughly between $1.7 billion and $1.9 billion. But as late as in July it could be bought for under $25 per share, or the whole lot for well under a billion dollars. Congratulations to those brave souls who bought at under $25.
The numbers only tell part of the story of a company like Pharmion, but they are worth looking at. Q3 2007 revenues were $67.3 million. Annualized that is $269 million. Revenues have been growing, but not at the kind of rate that awes: revenues for all of 2005 were $221 million.
As to net income or earnings, there are none. But losses are substantial, amounting to only $21.4 million in Q3 2007 (after an only $9 million loss in Q2). That is a number that makes it look like break even could be a long way away. But it includes "a charge of $8 million for a milestone payment triggered by the acceptance of our marketing authorization application (MAA) for Satraplatin for the treatment of second-line hormone-refractory prostate cancer by the European Medicines Agency (EMEA)."
Where do the revenues come from, and how much might they grow in the next couple of years? Vidaza for myelodysplastic syndromes (MDS) is marketed in the U.S. and had $43.2 million in Q3 2007 sales. Sales of Thalidomide were $20.2 million.
End of Q3 Pharmion had $258 million in cash in its coffers, so it could have gone on alone, without a partner, until expanded sales took it to profitability.
Pharmion more buys rights to drugs and markets them (if they are approved by the FDA or EMEA or other nations) than develops them from scratch. It has the right to sell Celgene's Thalomid (Thalidomide) for multiple myeloma in Europe. It is seeking approval of Vidaza in Europe, where it is already sold on a compassionate use basis. The latest clinical results for Vidaza are very encouraging; it is hoped that physicians will be impressed and use it more than competitors.
Pharmion has a pipeline of promising drugs as well, notably including Amrubicin for small cell lung cancer in a Phase 3 study, MGCD0103 early studies in solid tumors and CLL for and it has commenced a program targeting sirtuin inhibitors.
How do you value all that? Truthfully, you can go in many directions. Pipelines should always be heavily discounted because most drugs fail to reach market for one reason or another; even drugs with promising Phase III results may not be approved by the FDA. For instance in an 8-K filed 10/31/2007, Pharmion said Satraplatin failed to achieve its goals in a Phase III trial when combined with Prednisone for treatment of patients with hormone-refractory prostate cancer. But that does not mean Satraplatin will not prove effective for other types of cancer.
Approval of Vidaza in Europe are highly probably; that is worth quite a bit, since revenues from Europe should help cover overhead and push Pharmion to profitability. Apparently approval for Thalomid for multiple myeloma in Europe is also very likely.
Still, as a Celgene stockholder I wish the price were more conservative. Celgene feels it is buying an international sales operation, but I suspect they could have put one together for far less than the price of Pharmion.
In the last couple of years two of my companies have made major acquisitions that were supposed to be long term strategic, and might still out to be, but killed the stock price in the short run. One was AMD, which bought ATI (which I also owned). The other was Marvell, which bought Intel's cell phone microprocessor division. I'm not going to sell my Celgene stock just because of those bad experiences (and I kept the MRVL and AMD stock, too), but I am not inspired with confidence.
I felt I had a grip on Celgene's history and prospects when I bought it. Now I feel it is a far riskier proposition. I am not at my limit for Celgene in my portfolio model, so I might have bought more on the dips. Now I'll leave it alone, at least until the acquisition is complete and we start seeing more meaningful Vidaza revenue.
More data:
My Celgene page (with links to Celgene Analyst Conference summaries)
www.celgene.com
www.pharmion.com
In October Pharmion, which has just under 37 million shares outstanding, was running mostly between $45 and $50 per share, so its market capitalization was roughly between $1.7 billion and $1.9 billion. But as late as in July it could be bought for under $25 per share, or the whole lot for well under a billion dollars. Congratulations to those brave souls who bought at under $25.
The numbers only tell part of the story of a company like Pharmion, but they are worth looking at. Q3 2007 revenues were $67.3 million. Annualized that is $269 million. Revenues have been growing, but not at the kind of rate that awes: revenues for all of 2005 were $221 million.
As to net income or earnings, there are none. But losses are substantial, amounting to only $21.4 million in Q3 2007 (after an only $9 million loss in Q2). That is a number that makes it look like break even could be a long way away. But it includes "a charge of $8 million for a milestone payment triggered by the acceptance of our marketing authorization application (MAA) for Satraplatin for the treatment of second-line hormone-refractory prostate cancer by the European Medicines Agency (EMEA)."
Where do the revenues come from, and how much might they grow in the next couple of years? Vidaza for myelodysplastic syndromes (MDS) is marketed in the U.S. and had $43.2 million in Q3 2007 sales. Sales of Thalidomide were $20.2 million.
End of Q3 Pharmion had $258 million in cash in its coffers, so it could have gone on alone, without a partner, until expanded sales took it to profitability.
Pharmion more buys rights to drugs and markets them (if they are approved by the FDA or EMEA or other nations) than develops them from scratch. It has the right to sell Celgene's Thalomid (Thalidomide) for multiple myeloma in Europe. It is seeking approval of Vidaza in Europe, where it is already sold on a compassionate use basis. The latest clinical results for Vidaza are very encouraging; it is hoped that physicians will be impressed and use it more than competitors.
Pharmion has a pipeline of promising drugs as well, notably including Amrubicin for small cell lung cancer in a Phase 3 study, MGCD0103 early studies in solid tumors and CLL for and it has commenced a program targeting sirtuin inhibitors.
How do you value all that? Truthfully, you can go in many directions. Pipelines should always be heavily discounted because most drugs fail to reach market for one reason or another; even drugs with promising Phase III results may not be approved by the FDA. For instance in an 8-K filed 10/31/2007, Pharmion said Satraplatin failed to achieve its goals in a Phase III trial when combined with Prednisone for treatment of patients with hormone-refractory prostate cancer. But that does not mean Satraplatin will not prove effective for other types of cancer.
Approval of Vidaza in Europe are highly probably; that is worth quite a bit, since revenues from Europe should help cover overhead and push Pharmion to profitability. Apparently approval for Thalomid for multiple myeloma in Europe is also very likely.
Still, as a Celgene stockholder I wish the price were more conservative. Celgene feels it is buying an international sales operation, but I suspect they could have put one together for far less than the price of Pharmion.
In the last couple of years two of my companies have made major acquisitions that were supposed to be long term strategic, and might still out to be, but killed the stock price in the short run. One was AMD, which bought ATI (which I also owned). The other was Marvell, which bought Intel's cell phone microprocessor division. I'm not going to sell my Celgene stock just because of those bad experiences (and I kept the MRVL and AMD stock, too), but I am not inspired with confidence.
I felt I had a grip on Celgene's history and prospects when I bought it. Now I feel it is a far riskier proposition. I am not at my limit for Celgene in my portfolio model, so I might have bought more on the dips. Now I'll leave it alone, at least until the acquisition is complete and we start seeing more meaningful Vidaza revenue.
More data:
My Celgene page (with links to Celgene Analyst Conference summaries)
www.celgene.com
www.pharmion.com
Wednesday, November 21, 2007
AMD Valuation
Last year AMD bought ATI for $5.4 billion. Today AMD is valued by the market at $5.9 billion. What gives? What sort of valuation should be put on AMD stock?
AMD, of course, makes microprocessors, or CPU's, the cores of computers. It traditionally competed only in the PC space until it introduced its Opteron processor for servers in 2003, and usually had less than 10% of the market, with Intel having about 90%. From 2003 until 2005 AMD had a good run, gaining market share and hitting a stock price over $40 in January 2006. Then Intel struck back. By slashing its prices and promising a new generation of chips for later in 2006, Intel first cut into AMD's profit margins and then began to regain market share. The new chips introduced in 2006 had their faults but were overall on par with AMDs. Then came the ATI acquisition, which saddled AMD with a lot of debt. To add to this toxic brew, AMD's quad-core chips, code named Barcelona, were delayed in 2007. For more AMD background and history check out my AMD page.
Because of the necessity of competing on price and the poor sales of ATI chips after the acquisition (competitor NVIDIA introduced new graphics chips that put ATI behind), AMD has had a very bad year. The good news is that the stock is now astonishingly cheap, if you are willing to pick up on the risk. Last week a wealthy shiek bought some $600 million's worth, so you would not be alone in your gamble. [I own AMD stock and also owned ATI stock before the merger. I also once owned NVIDIA stock but foolishly sold it.]
Lets use the numbers from AMD's latest quarter, Q3 2007, as a proxy for its current condition [See also my AMD October 18, 2007 Analyst Conference Summary]. Revenues were $1.63 billion, up 18% from Q2 2007 and up 22% from year-earlier.
Which would seem to say that AMD is accelerating out of its 2006 slump, at least on the revenue side.
Q3 2007 net loss was $226 million, which tells you the core story of AMD's low stock price. While it was better than the net loss of $457 million in Q2, it was a reversal of a net income of $121 million in Q3 2006. Q3 2006 in itself was not a good quarter for profits.
The main reason I think AMD is underpriced is because in Q3 2007 it reached positive cash flow. That is, much of the net loss was for non-cash expenses, including ATI acquisition costs. AMD spent the money on ATI last year, but under generally accepted accounting principles (GAAP) some of that expense is written off over time.
Also, AMD shipped a record number of processors in Q3. Despite predictions by Intel fans that AMD would sink back into the obscurity from whence it came, and claims that AMD notebook chips sales would be down, AMD's processors for notebook computers had 68% better unit shipments than the year-earlier quarter.
After some real problems marketing graphics chips after the ATI acquisition, that segment seems to be getting on track with a 29% sequential increase in graphics revenue.
Intel has always led AMD in process technology (the ability to put more logic gates in the same area of a chip). Just a few years ago AMD was typically two years behind Intel. This month Intel introduced chips using 45nm technology, though they don't seem to be actually available in any quantity yet. AMD said it 45nm chips will ramp in Q2 2008. My guess is that means a May release, so AMD has closed that gap down to 7 months. But AMD has a lead in putting 4 processor cores on a single semiconductor chip, and in design architecture.
If AMD were a recent startup investors would probably consider it a tiger, given all these trends. Intel is a heavy competitor, of course, so heavy that many nations are looking into Intel's reputation for illegal anti-competitive practices and AMD had to file a lawsuit to force Intel to allow computer makers to by AMD chips without retribution.
While Intel is AMD's main danger, a secondary risk would be the possibility of a slowing of the expansion of the computer market. Given the booms in India, China, Russia and elsewhere, I'd prefer to bet on a strong global market even if the U.S. market weakens.
One place AMD shines is giving its customers (the computer makers) what they want, in contrast to Intel's take-it-or-leave-it approach.
Another downside concern is the slow pace of introduction of quad-core Opterons. If AMD does not get its act together on this soon, it could lose all the gains it made since 2002 in the relatively high profit margin AMD market.
On balance, I see AMD growing in 2008, with positive cash flow and progress probably positive GAAP net income by the second half. AMD's stock price probably won't move above $15 per share until this current run of market turmoil ends and AMD shows 2 consecutive quarters of profitability.
But with a current revenue annual run rate of $6.5 billion, and apparently accelerating, I think a rational market would put the market cap at no lower than $7 billion. Which works out to $12.65 per share.
And if indeed AMD continues to gain revenues as quickly as it has lately (possible with its new Phenom processor, quad-core Opteron, and Spider graphics system), it could go a lot higher a lot sooner than most analysts and investors think.
AMD believed it would have a long-term competitive advantage if it became the only company with high-end graphics and general microprocessor capability. It might still be proven right.
Strangely, while I've been writing this its AMD's stock price has risen to $11.05, from $10.55 or so when I started writing.
More data:
www.amd.com
competitors:
www.intel.com
www.nvidia.com
AMD, of course, makes microprocessors, or CPU's, the cores of computers. It traditionally competed only in the PC space until it introduced its Opteron processor for servers in 2003, and usually had less than 10% of the market, with Intel having about 90%. From 2003 until 2005 AMD had a good run, gaining market share and hitting a stock price over $40 in January 2006. Then Intel struck back. By slashing its prices and promising a new generation of chips for later in 2006, Intel first cut into AMD's profit margins and then began to regain market share. The new chips introduced in 2006 had their faults but were overall on par with AMDs. Then came the ATI acquisition, which saddled AMD with a lot of debt. To add to this toxic brew, AMD's quad-core chips, code named Barcelona, were delayed in 2007. For more AMD background and history check out my AMD page.
Because of the necessity of competing on price and the poor sales of ATI chips after the acquisition (competitor NVIDIA introduced new graphics chips that put ATI behind), AMD has had a very bad year. The good news is that the stock is now astonishingly cheap, if you are willing to pick up on the risk. Last week a wealthy shiek bought some $600 million's worth, so you would not be alone in your gamble. [I own AMD stock and also owned ATI stock before the merger. I also once owned NVIDIA stock but foolishly sold it.]
Lets use the numbers from AMD's latest quarter, Q3 2007, as a proxy for its current condition [See also my AMD October 18, 2007 Analyst Conference Summary]. Revenues were $1.63 billion, up 18% from Q2 2007 and up 22% from year-earlier.
Which would seem to say that AMD is accelerating out of its 2006 slump, at least on the revenue side.
Q3 2007 net loss was $226 million, which tells you the core story of AMD's low stock price. While it was better than the net loss of $457 million in Q2, it was a reversal of a net income of $121 million in Q3 2006. Q3 2006 in itself was not a good quarter for profits.
The main reason I think AMD is underpriced is because in Q3 2007 it reached positive cash flow. That is, much of the net loss was for non-cash expenses, including ATI acquisition costs. AMD spent the money on ATI last year, but under generally accepted accounting principles (GAAP) some of that expense is written off over time.
Also, AMD shipped a record number of processors in Q3. Despite predictions by Intel fans that AMD would sink back into the obscurity from whence it came, and claims that AMD notebook chips sales would be down, AMD's processors for notebook computers had 68% better unit shipments than the year-earlier quarter.
After some real problems marketing graphics chips after the ATI acquisition, that segment seems to be getting on track with a 29% sequential increase in graphics revenue.
Intel has always led AMD in process technology (the ability to put more logic gates in the same area of a chip). Just a few years ago AMD was typically two years behind Intel. This month Intel introduced chips using 45nm technology, though they don't seem to be actually available in any quantity yet. AMD said it 45nm chips will ramp in Q2 2008. My guess is that means a May release, so AMD has closed that gap down to 7 months. But AMD has a lead in putting 4 processor cores on a single semiconductor chip, and in design architecture.
If AMD were a recent startup investors would probably consider it a tiger, given all these trends. Intel is a heavy competitor, of course, so heavy that many nations are looking into Intel's reputation for illegal anti-competitive practices and AMD had to file a lawsuit to force Intel to allow computer makers to by AMD chips without retribution.
While Intel is AMD's main danger, a secondary risk would be the possibility of a slowing of the expansion of the computer market. Given the booms in India, China, Russia and elsewhere, I'd prefer to bet on a strong global market even if the U.S. market weakens.
One place AMD shines is giving its customers (the computer makers) what they want, in contrast to Intel's take-it-or-leave-it approach.
Another downside concern is the slow pace of introduction of quad-core Opterons. If AMD does not get its act together on this soon, it could lose all the gains it made since 2002 in the relatively high profit margin AMD market.
On balance, I see AMD growing in 2008, with positive cash flow and progress probably positive GAAP net income by the second half. AMD's stock price probably won't move above $15 per share until this current run of market turmoil ends and AMD shows 2 consecutive quarters of profitability.
But with a current revenue annual run rate of $6.5 billion, and apparently accelerating, I think a rational market would put the market cap at no lower than $7 billion. Which works out to $12.65 per share.
And if indeed AMD continues to gain revenues as quickly as it has lately (possible with its new Phenom processor, quad-core Opteron, and Spider graphics system), it could go a lot higher a lot sooner than most analysts and investors think.
AMD believed it would have a long-term competitive advantage if it became the only company with high-end graphics and general microprocessor capability. It might still be proven right.
Strangely, while I've been writing this its AMD's stock price has risen to $11.05, from $10.55 or so when I started writing.
More data:
www.amd.com
competitors:
www.intel.com
www.nvidia.com
Tuesday, November 20, 2007
Applied Materials (AMAT) Valuation
Applied Materials, Inc., (AMAT) is a maker of semiconductor fabrication equipment. It has a long history of profitability. This year it is gearing up selling equipment to make solar panels, so it is part of the Green Technology boom. So how should we value its stock?
Unfortunately these are not boom times for silicon equipment manufacturers. Reported results for the fiscal 4th quarter ending October 29, 2007 (See Analyst Conference Summary), included revenues of $2.37 billion that were down 6% from year earlier. It was also a 7.5% slump from the fiscal 3rd quarter.
Net income was roughly down the same, to $422 million.
Still, that shows there is plenty of profit margin built into AMAT's products. Net income was 5.6% of revenues.
Generally, you want to believe that this is just a slow period due to macroeconomic uncertainty. So revenues will go up again. But in this situation you can argue what the P/E (price to earnings) ratio of the stock should be. A wide spectrum is possible.
Today AMAT stock ended at $, giving it a market capitalization of $25.1 billion. Multiply Q4 net income by 4 and you have an annual run rate of $1.69 billion. So the current P/E is 15, and inverting that you get a rate of return on the stock of 6.7%, which is not bad at all. Unless earnings continue to decline; then it would not look so great.
Trailing earnings (the sum of the last 4 reported quarters) are higher than 4 x Q4, so if you want to use that for your annual earnings estimate you get a lower PE and a higher rate of return.
I agree with management that if macroeconomic turmoil increases 2008 could be a rough year. But if people calm down, they will see that demand for electronic devices is booming globally. Many fabs are running at pretty near capacity. So 2008 could also see an increase in equipment orders to keep up with demand and with changing technologies.
When you throw in that Applied Materials has really just gotten started in solar with their SunFab equipment, I think the chances of an improved 2008 are pretty good. The downside risks are relatively low.
That means I believe Applied Materials is undervalued at today's price. On the other hand the stock market is in a funk right now, so you can pick stocks randomly and most will prove to be undervalued.
More data:
Applied Materials Investor Relations page
My Applied Materials (AMAT) page
Unfortunately these are not boom times for silicon equipment manufacturers. Reported results for the fiscal 4th quarter ending October 29, 2007 (See Analyst Conference Summary), included revenues of $2.37 billion that were down 6% from year earlier. It was also a 7.5% slump from the fiscal 3rd quarter.
Net income was roughly down the same, to $422 million.
Still, that shows there is plenty of profit margin built into AMAT's products. Net income was 5.6% of revenues.
Generally, you want to believe that this is just a slow period due to macroeconomic uncertainty. So revenues will go up again. But in this situation you can argue what the P/E (price to earnings) ratio of the stock should be. A wide spectrum is possible.
Today AMAT stock ended at $, giving it a market capitalization of $25.1 billion. Multiply Q4 net income by 4 and you have an annual run rate of $1.69 billion. So the current P/E is 15, and inverting that you get a rate of return on the stock of 6.7%, which is not bad at all. Unless earnings continue to decline; then it would not look so great.
Trailing earnings (the sum of the last 4 reported quarters) are higher than 4 x Q4, so if you want to use that for your annual earnings estimate you get a lower PE and a higher rate of return.
I agree with management that if macroeconomic turmoil increases 2008 could be a rough year. But if people calm down, they will see that demand for electronic devices is booming globally. Many fabs are running at pretty near capacity. So 2008 could also see an increase in equipment orders to keep up with demand and with changing technologies.
When you throw in that Applied Materials has really just gotten started in solar with their SunFab equipment, I think the chances of an improved 2008 are pretty good. The downside risks are relatively low.
That means I believe Applied Materials is undervalued at today's price. On the other hand the stock market is in a funk right now, so you can pick stocks randomly and most will prove to be undervalued.
More data:
Applied Materials Investor Relations page
My Applied Materials (AMAT) page
Sunday, November 18, 2007
Altera (ALTR) Valuation
Altera (ALTR) makes programmable logic devices (PLDs). Before doing a valuation of this company's stock price, I need to remind myself about numbers. Numbers sometimes hypnotize tech guys and gals. Stock prices are about the future, so unless you are doing quick, in-and-out momentum trading or some similar strategy, you need to be careful with numbers. The future of a technology company, and hence its stock price, is tied to how broadly its technology will be adapted in the future, and how well it can shift to new technologies when they become the future.
If you don't know about PLDs and their variations known as CPLDs and FPGAs, check out my Altera, FPGAs and FPGAs blog entry from March.
I tend to go with the future of PLDs is rosy theory, but keep in mind that does not mean every PLD maker will be successful. With that caveat in mind, let's look at recent Altera numbers and trends.
Altera's last reported numbers were for Q3 2007. Revenues were $$315.8 million, down 1% from $319.7 million in Q2 and down 7% from year-earlier $341.2 million.
That is pretty grim, and net income was $69.0 million, down 14% sequentially from $80.5 million and down 21% from $87.4 million year-earlier. Not good, but here's what is good: even in a slump the company has enough profit margins in its products to earn investors substantial net income.
Because Altera is not a rapidly growing company, you can buy its stock at a pretty fair Price-to-earnings ration (PE). It closed Friday, November 17, 2007 at $18.90 per share, giving the company a market capitalization of $6.5 billion. Using Q3 net income, annualizing by multiplying by 4 we get $276 million. Dividing that into market cap we get a current PE of 23.6. Inverting that we get a rate of return of 4.2%.
There are worse things than a rate of return of 4.2%, but it is not exactly an encouraging number. Nor does Altera management see a quick turn around. They expect Q4 2007 revenues to be sequentially flat to down 4%.
Maybe this is a bad year because of macroeconomic uncertainty, but there is going to be macroeconomic uncertainty in 2008 too. I suspect inventories are lean at this point, so a pick up in demand could cause customers to up their inventories as well. I think PLDs have a good future because they can cost less than ASICs for smaller production runs, which means the when a technology needs to be updated frequently PLDs are the way to go.
Still, at this stock price, for my portfolio needs, Altera is in the upper end of the fairly valued range. It is a safe, well run, profitable performer, but my local Credit Union will give me more return on my money with much less risk.
But I'll keep an eye on the stock. If it goes below its 52-week low of $18.47, based just on a general stock-market drop rather than on any negative Altera news, I could see picking some up. These are some real smart people at Altera trying to figure out how to sell some new designs they are introducing.
I have never owned Altera or a direct competitor, but I own other makers of semiconductor chips.
More data:
My Altera page (with links to my summaries of Altera analyst conferences)
www.altera.com
If you don't know about PLDs and their variations known as CPLDs and FPGAs, check out my Altera, FPGAs and FPGAs blog entry from March.
I tend to go with the future of PLDs is rosy theory, but keep in mind that does not mean every PLD maker will be successful. With that caveat in mind, let's look at recent Altera numbers and trends.
Altera's last reported numbers were for Q3 2007. Revenues were $$315.8 million, down 1% from $319.7 million in Q2 and down 7% from year-earlier $341.2 million.
That is pretty grim, and net income was $69.0 million, down 14% sequentially from $80.5 million and down 21% from $87.4 million year-earlier. Not good, but here's what is good: even in a slump the company has enough profit margins in its products to earn investors substantial net income.
Because Altera is not a rapidly growing company, you can buy its stock at a pretty fair Price-to-earnings ration (PE). It closed Friday, November 17, 2007 at $18.90 per share, giving the company a market capitalization of $6.5 billion. Using Q3 net income, annualizing by multiplying by 4 we get $276 million. Dividing that into market cap we get a current PE of 23.6. Inverting that we get a rate of return of 4.2%.
There are worse things than a rate of return of 4.2%, but it is not exactly an encouraging number. Nor does Altera management see a quick turn around. They expect Q4 2007 revenues to be sequentially flat to down 4%.
Maybe this is a bad year because of macroeconomic uncertainty, but there is going to be macroeconomic uncertainty in 2008 too. I suspect inventories are lean at this point, so a pick up in demand could cause customers to up their inventories as well. I think PLDs have a good future because they can cost less than ASICs for smaller production runs, which means the when a technology needs to be updated frequently PLDs are the way to go.
Still, at this stock price, for my portfolio needs, Altera is in the upper end of the fairly valued range. It is a safe, well run, profitable performer, but my local Credit Union will give me more return on my money with much less risk.
But I'll keep an eye on the stock. If it goes below its 52-week low of $18.47, based just on a general stock-market drop rather than on any negative Altera news, I could see picking some up. These are some real smart people at Altera trying to figure out how to sell some new designs they are introducing.
I have never owned Altera or a direct competitor, but I own other makers of semiconductor chips.
More data:
My Altera page (with links to my summaries of Altera analyst conferences)
www.altera.com
Friday, November 16, 2007
Akamai Valuation
Akamai (AKAM) continues to be the premier accelerator of Web content and is growing profits rapidly. But its stock price has been all over the place this last year. Some investors will buy at any price when they feel Akamai is their transport to great wealth. Yet this high price-to-earnings stock gets subjected to periodic waves of fear, often driven by rumors of competitors cutting in on the business.
For background on what Akamai does you might try my Understanding Akamai blog entry. For summaries of Akamai's recent quarterly reports and analyst conferences see my main Akamai page.
Your standard data for how unstable a stock's price is, the 52 week high/low, today ended at $59.69 high, $27.75 low. So if you bought at the low this year, then sold at the high, you more than doubled your money. On the other hand that would make you a time traveller or a short-seller, because the low came in September after the high in February.
Looking at a chart of Akamai's price for the past ten years (See NASDAQ's AKAM chart), we see that Akamai IPO'd back in 1999 as one of those "it could be the next Microsoft" stocks. It went to well over $300 per share before reality set in. It went below $1 per share in the summer of 2002. I wish I had bought some then! [I have never owned Akamai stock.] But in 2002 there were lots of technology stock bargains and some of them were making a profit; Akamai was not.
The funny thing about a stock actually making a profit is that instead of being priced on hype the stock starts getting priced more on its earnings. Such stocks may have a sky-high price-to-earnings ratio, as Akamai had back as recently as December 2006, when its P/E ratio was 156.
What I am trying to say here is that different investors price stocks by different criteria. As a result there is no set price where Akamai should be. You should develop criteria for your portfolio, and do your own analysis, to decide whether a stock's price is too high or too low for you. I like to use a conservative pricing model. That minimizes the risk that I am buying an overpriced stock.
Today Akamai stock ended at $36.15. That gives the company a market capitalization (stock price times number of shares outstanding) of a shade under $6 billion.
In the last quarter GAAP (generally accepted accounting principles) earnings for AKAM were $24.3 million. That was up 6% from Q2 and 73% from Q3 2006, so I think we can use the number and still be conservative. Multiply by four and you have an annual net income of $97 million. Using that, dividing into the market capitalization, we get a P/E ratio of about 62, or a return on capital of just 1.6%. Of course you can do better with a CD. Investors are hoping that Akamai keeps growing its earning rapidly, so in 2 or 3 years, even if the stock price is flat, earnings will rise to 5% or more. Okay, what investors really want is for earnings to triple in short order and the P/E ratio to stay high, because then the stock price has tripled in short order (say within 2 years).
There are two main dangers in high P/E stocks. One is that earnings will flatten or even fall, taking away the justification for the high P/E. The other is that as the company becomes larger, investors will become reluctant to project as much earnings growth into the future, and the P/E will decline even with rapid earnings growth. So you had better have a really good reason to buy a stock if it has a high P/E ratio.
Akamai management and its favorite analysts and investors will say that you should not judge the company by GAAP earnings at all. Non-GAAP earnings are far higher. Non-GAAP earnings, in Akamai's case, amount to what they call "normalized net income." In Q3 that was $62.4 million. That is over twice GAAP earnings. If you use that figure, annualizing it as I did above, you get a "normalized" P/E ratio of 24.
Hey, that is cheap for a rapidly growing company. But how real is "normalized?" One test is cash flow. It is not an infallible test, but it is a good one to apply. According to Akamai Q3 cash from operations was $77.4 million, which is even higher than the normalized income.
I think other companies would like to cut in on Akamai's market, but they are trailing its leadership. The market for Web acceleration services is growing rapidly, so even if Akamai just holds onto its market share, it should grow rapidly in the next few years. Risk is not negligible, but it is well-outweighed by opportunity at this point. There is the usual macroeconomic risk that all companies have some exposure to.
I don't think it is crazy to buy Akamai at today's price. If I could see the future more clearly I might call it a bargain for a long term investor. Obviously it is a speculator's favorite, so it is likely to be volatile. Given other opportunities in the market, I think if you did not buy it at under $30 per share in September, you should not be doing more than nibbling at it here.
Remember, diversity rules.
For more data:
www.akamai.com
For background on what Akamai does you might try my Understanding Akamai blog entry. For summaries of Akamai's recent quarterly reports and analyst conferences see my main Akamai page.
Your standard data for how unstable a stock's price is, the 52 week high/low, today ended at $59.69 high, $27.75 low. So if you bought at the low this year, then sold at the high, you more than doubled your money. On the other hand that would make you a time traveller or a short-seller, because the low came in September after the high in February.
Looking at a chart of Akamai's price for the past ten years (See NASDAQ's AKAM chart), we see that Akamai IPO'd back in 1999 as one of those "it could be the next Microsoft" stocks. It went to well over $300 per share before reality set in. It went below $1 per share in the summer of 2002. I wish I had bought some then! [I have never owned Akamai stock.] But in 2002 there were lots of technology stock bargains and some of them were making a profit; Akamai was not.
The funny thing about a stock actually making a profit is that instead of being priced on hype the stock starts getting priced more on its earnings. Such stocks may have a sky-high price-to-earnings ratio, as Akamai had back as recently as December 2006, when its P/E ratio was 156.
What I am trying to say here is that different investors price stocks by different criteria. As a result there is no set price where Akamai should be. You should develop criteria for your portfolio, and do your own analysis, to decide whether a stock's price is too high or too low for you. I like to use a conservative pricing model. That minimizes the risk that I am buying an overpriced stock.
Today Akamai stock ended at $36.15. That gives the company a market capitalization (stock price times number of shares outstanding) of a shade under $6 billion.
In the last quarter GAAP (generally accepted accounting principles) earnings for AKAM were $24.3 million. That was up 6% from Q2 and 73% from Q3 2006, so I think we can use the number and still be conservative. Multiply by four and you have an annual net income of $97 million. Using that, dividing into the market capitalization, we get a P/E ratio of about 62, or a return on capital of just 1.6%. Of course you can do better with a CD. Investors are hoping that Akamai keeps growing its earning rapidly, so in 2 or 3 years, even if the stock price is flat, earnings will rise to 5% or more. Okay, what investors really want is for earnings to triple in short order and the P/E ratio to stay high, because then the stock price has tripled in short order (say within 2 years).
There are two main dangers in high P/E stocks. One is that earnings will flatten or even fall, taking away the justification for the high P/E. The other is that as the company becomes larger, investors will become reluctant to project as much earnings growth into the future, and the P/E will decline even with rapid earnings growth. So you had better have a really good reason to buy a stock if it has a high P/E ratio.
Akamai management and its favorite analysts and investors will say that you should not judge the company by GAAP earnings at all. Non-GAAP earnings are far higher. Non-GAAP earnings, in Akamai's case, amount to what they call "normalized net income." In Q3 that was $62.4 million. That is over twice GAAP earnings. If you use that figure, annualizing it as I did above, you get a "normalized" P/E ratio of 24.
Hey, that is cheap for a rapidly growing company. But how real is "normalized?" One test is cash flow. It is not an infallible test, but it is a good one to apply. According to Akamai Q3 cash from operations was $77.4 million, which is even higher than the normalized income.
I think other companies would like to cut in on Akamai's market, but they are trailing its leadership. The market for Web acceleration services is growing rapidly, so even if Akamai just holds onto its market share, it should grow rapidly in the next few years. Risk is not negligible, but it is well-outweighed by opportunity at this point. There is the usual macroeconomic risk that all companies have some exposure to.
I don't think it is crazy to buy Akamai at today's price. If I could see the future more clearly I might call it a bargain for a long term investor. Obviously it is a speculator's favorite, so it is likely to be volatile. Given other opportunities in the market, I think if you did not buy it at under $30 per share in September, you should not be doing more than nibbling at it here.
Remember, diversity rules.
For more data:
www.akamai.com
Tuesday, November 13, 2007
Adobe (ADBE) Valuation
It is always fun to put your independent value on a stock and compare it to the current selling price. More than just fun, it is the way smart investors make money. Today I'll be looking at Adobe Systems Incorporated (ADBE). I have never owned Adobe stock though I have followed it for a while. What Adobe reports in its quarterly analyst conferences (see my Adobe summaries) does give insight into some of the stocks I do own and the health of the technology sector in general.
Adobe is on a different fiscal year than most companies. Its third fiscal 2007 quarter ended August 31, 2007, and it released the results for the quarter and held the analyst conference on September 17, 2007. That means the current quarter will end November 30th, which is soon, and the conference will be in mid-December.
Revenues for fiscal Q3 were $852 million, up 14% from Q2 and up 41% from year-earlier. Net income was $205 million, up 35% sequentially and up 117% from year-earlier.
So if you like to draw straight lines, you might guess that in fiscal 2008 Q3 will generate some well over $400 million in net income, and in 2009 $600 million. Of course you can also use the same percentage increase each year, which gives well over $800 million.
Multiply those numbers out by 4 to get annual net income, and you get $1.6 billion in 2008 and either $2.4 billion or $3.2 billion in 2009. Adobe looks like a gold mine. Therefore, the bulls would argue, it deserves a stock price that gives a high price-to-earnings (PE) ratio, if you base it on past earnings.
Right this moment Adobe is having a bad day. It is priced at $39.72 and its resulting market capitalization (number of shares x price) is $23.4 billion. Its Nasdaq page gives it a trailing PE of 27.4.
Trailing earnings, the total of the past 4 reported quarters, are lower for a growing company than what you get if you multiply the recent, highest quarter by 4. Hoping that the future is always onward and upward, or at least flat, take the annual rate based on 4 x $205 million or $820 million. Divide that into today's market capitalization and you get - 28.5. So invert 28.5 for the rate of return of earnings on what you pay for a share of stock. The result is 3.5%.
You can do better than 3.5% on a CD. But suppose we look further out, using the most optimistic assumption based on recent data. Suppose fiscal 2009 net income is really $3.2 billion. What then. Why, at todays price and market capitalization, the PE ratio would be an ultra-low 7.3 and the earnings on your hard-saved dollar would be 13.7%. That does look like a gold mine.
Which is why valuing stock is such an art. If there is a recession or depression, Adobe won't be seeing $3.2 billion in net income in 2009. If some other company brings out a new product that cuts heavily into one of Adobe's lines, growth could slow down. On the other hand if all the new designers in India and China decide they need Adobe's software and actually pay for copies instead of pirating it, the $3.2 billion mark could be passed easily.
I prefer to go on conservative assumptions. Adobe has had periods of rapid growth and of slow growth in the past. This year new versions of old products were introduced, and that tends to give a burst of speed. If I had to choose a number rather than a range of numbers, I would actually do more research, but for this blog I'd say expect about 20% growth in revenues in Q3 fiscal 2008 over Q3 fiscal 2007.
A useful benchmark is that a PE of 20 is a return of 5%. Me, I like some of those earnings returned in dividends, which may seem old-fashioned but which tends to preserve stock prices in general market downturns.
If I were actually thinking of buying or selling Adobe I would do a lot more research and number play. But this is just an exercise, or a screening that I would do to many stocks before choosing one or more to invest in.
I'd saw that a PE of 30 is in the ballpark for Adobe. So today it is somewhat undervalued by my standards. That, I believe, is mainly because the market as a whole has been weak lately. I believe most tech stocks, excluding Apple, Google, and a few other high-flyers, are at least slightly undervalued right now. That is based on my macroeconomic assumption that the risk of an actual recession in 2008-2009 is low, the risk of a depression is near zero, and in fact the most likely scenario is slow growth in Q1 of 2008, then some acceleration in 2008 as people begin to build and buy houses again.
Truthfully, the best bargains right now are probably in real estate, not the stock market. However, an ordinary investor can get much better diversity in the stock market. For an ordinary investor buying a single piece of real estate is putting a lot on a single roll of the dice, as many ex-flipper found out this year.
Adobe is on a different fiscal year than most companies. Its third fiscal 2007 quarter ended August 31, 2007, and it released the results for the quarter and held the analyst conference on September 17, 2007. That means the current quarter will end November 30th, which is soon, and the conference will be in mid-December.
Revenues for fiscal Q3 were $852 million, up 14% from Q2 and up 41% from year-earlier. Net income was $205 million, up 35% sequentially and up 117% from year-earlier.
So if you like to draw straight lines, you might guess that in fiscal 2008 Q3 will generate some well over $400 million in net income, and in 2009 $600 million. Of course you can also use the same percentage increase each year, which gives well over $800 million.
Multiply those numbers out by 4 to get annual net income, and you get $1.6 billion in 2008 and either $2.4 billion or $3.2 billion in 2009. Adobe looks like a gold mine. Therefore, the bulls would argue, it deserves a stock price that gives a high price-to-earnings (PE) ratio, if you base it on past earnings.
Right this moment Adobe is having a bad day. It is priced at $39.72 and its resulting market capitalization (number of shares x price) is $23.4 billion. Its Nasdaq page gives it a trailing PE of 27.4.
Trailing earnings, the total of the past 4 reported quarters, are lower for a growing company than what you get if you multiply the recent, highest quarter by 4. Hoping that the future is always onward and upward, or at least flat, take the annual rate based on 4 x $205 million or $820 million. Divide that into today's market capitalization and you get - 28.5. So invert 28.5 for the rate of return of earnings on what you pay for a share of stock. The result is 3.5%.
You can do better than 3.5% on a CD. But suppose we look further out, using the most optimistic assumption based on recent data. Suppose fiscal 2009 net income is really $3.2 billion. What then. Why, at todays price and market capitalization, the PE ratio would be an ultra-low 7.3 and the earnings on your hard-saved dollar would be 13.7%. That does look like a gold mine.
Which is why valuing stock is such an art. If there is a recession or depression, Adobe won't be seeing $3.2 billion in net income in 2009. If some other company brings out a new product that cuts heavily into one of Adobe's lines, growth could slow down. On the other hand if all the new designers in India and China decide they need Adobe's software and actually pay for copies instead of pirating it, the $3.2 billion mark could be passed easily.
I prefer to go on conservative assumptions. Adobe has had periods of rapid growth and of slow growth in the past. This year new versions of old products were introduced, and that tends to give a burst of speed. If I had to choose a number rather than a range of numbers, I would actually do more research, but for this blog I'd say expect about 20% growth in revenues in Q3 fiscal 2008 over Q3 fiscal 2007.
A useful benchmark is that a PE of 20 is a return of 5%. Me, I like some of those earnings returned in dividends, which may seem old-fashioned but which tends to preserve stock prices in general market downturns.
If I were actually thinking of buying or selling Adobe I would do a lot more research and number play. But this is just an exercise, or a screening that I would do to many stocks before choosing one or more to invest in.
I'd saw that a PE of 30 is in the ballpark for Adobe. So today it is somewhat undervalued by my standards. That, I believe, is mainly because the market as a whole has been weak lately. I believe most tech stocks, excluding Apple, Google, and a few other high-flyers, are at least slightly undervalued right now. That is based on my macroeconomic assumption that the risk of an actual recession in 2008-2009 is low, the risk of a depression is near zero, and in fact the most likely scenario is slow growth in Q1 of 2008, then some acceleration in 2008 as people begin to build and buy houses again.
Truthfully, the best bargains right now are probably in real estate, not the stock market. However, an ordinary investor can get much better diversity in the stock market. For an ordinary investor buying a single piece of real estate is putting a lot on a single roll of the dice, as many ex-flipper found out this year.
Thursday, November 8, 2007
Selling Cisco Low
Its a bargain hunter's dream today. There are two big trends in the stock market right now that are creating some bargain stock prices. One is the mortgage-backed securities meltdown, which has depleted many portfolios. People running these portfolios are reballancing them, which means selling stocks. They are selling stocks regardless of their underlying values.
The second is fear. People lost bundles in 2000-2001 and take flight easily. Many of the stocks that sank in 2001 had no earnings, some times they did not even have revenues to back their market capitalizations. Today stocks that are very profitable are being dumped - that is just plain fear.
Of course if there is a world-wide Great Depression starting next month, selling today will seem smart. But all reports are that the global economy is robust. There are weak spots like Japan and the U.S., but the weakness is mild and probably temporary.
There are, of course, frothy stocks out there. There are always some, just as even in an overpriced market you kind find some bargains. For froth, Apple, Google, and Intuitive Surgical (ISRG) leap to mind. But even with these three, they are solid companies that generate substantial profit; it is investor enthusiasm, the idea that these stocks only go up, that makes them frothy.
I have listened to a lot of analyst conferences this last two weeks. Some I am paid to listen to (I can't list those). Some I own, like Napster, Microsoft and Dendreon. Others I cover because of their general interest in the techonology domain and because I have taken to posting summaries of them at Openicon. These include Maxim, Onyx, and yesterday Cisco. Almost all these companies are doing well and have lower than reasonable stock prices right now.
Cisco (CSCO) is a good example of an undervalued stock. It is a gigantic company, yet its revenues for Q3 2007 grew over 16% from Q3 2006. Its earnings rose an amazing 37% over the same period.
Given that safe cash-like instruments that pay even 5% interest are getting hard to find, you would think that today a rock-bottom price for Cisco stock would be at about 20 times Q3 earnings. Given its growth rate, even thirty times earnings would not be adventurous. As I write you can buy the stock for $30.04 per share. If you could buy the whole company for that you would get the market capitalization, which is $182.7 billion. GAAP earnings in Q3 were $2.2 billion. Annualized that is $8.8 billion. Divide into the market capitalization and you get a P/E (price to earnings) ratio of 20.8.
But the most likely scenario is that a year from now revenues will be up again in the 15% range and earnings will be up 20% to 35%.
The only thing I don't like about Cisco is that it does not pay a dividend. I like dividends; I am not a fan of stock repurchases unless a company has a lot of cash and has very undervalued stock.
Be sure to see my summaries of Cisco analyst conferences.
Buy low, sell high. To be able to sell high you have to buy low. Yet I watch investors, even professional investors, buy high and then dispair and sell low. Today Cisco is low. And always balance the risk in your portfolio.
Always be careful how much you spend, no matter how rich you are or think you will become.
The second is fear. People lost bundles in 2000-2001 and take flight easily. Many of the stocks that sank in 2001 had no earnings, some times they did not even have revenues to back their market capitalizations. Today stocks that are very profitable are being dumped - that is just plain fear.
Of course if there is a world-wide Great Depression starting next month, selling today will seem smart. But all reports are that the global economy is robust. There are weak spots like Japan and the U.S., but the weakness is mild and probably temporary.
There are, of course, frothy stocks out there. There are always some, just as even in an overpriced market you kind find some bargains. For froth, Apple, Google, and Intuitive Surgical (ISRG) leap to mind. But even with these three, they are solid companies that generate substantial profit; it is investor enthusiasm, the idea that these stocks only go up, that makes them frothy.
I have listened to a lot of analyst conferences this last two weeks. Some I am paid to listen to (I can't list those). Some I own, like Napster, Microsoft and Dendreon. Others I cover because of their general interest in the techonology domain and because I have taken to posting summaries of them at Openicon. These include Maxim, Onyx, and yesterday Cisco. Almost all these companies are doing well and have lower than reasonable stock prices right now.
Cisco (CSCO) is a good example of an undervalued stock. It is a gigantic company, yet its revenues for Q3 2007 grew over 16% from Q3 2006. Its earnings rose an amazing 37% over the same period.
Given that safe cash-like instruments that pay even 5% interest are getting hard to find, you would think that today a rock-bottom price for Cisco stock would be at about 20 times Q3 earnings. Given its growth rate, even thirty times earnings would not be adventurous. As I write you can buy the stock for $30.04 per share. If you could buy the whole company for that you would get the market capitalization, which is $182.7 billion. GAAP earnings in Q3 were $2.2 billion. Annualized that is $8.8 billion. Divide into the market capitalization and you get a P/E (price to earnings) ratio of 20.8.
But the most likely scenario is that a year from now revenues will be up again in the 15% range and earnings will be up 20% to 35%.
The only thing I don't like about Cisco is that it does not pay a dividend. I like dividends; I am not a fan of stock repurchases unless a company has a lot of cash and has very undervalued stock.
Be sure to see my summaries of Cisco analyst conferences.
Buy low, sell high. To be able to sell high you have to buy low. Yet I watch investors, even professional investors, buy high and then dispair and sell low. Today Cisco is low. And always balance the risk in your portfolio.
Always be careful how much you spend, no matter how rich you are or think you will become.
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