Applied Materials (AMAT) Predicts Boom

Applied Materials makes the high technology capital equipment that fabricators use to make semiconductor chips, flat-pannel displays, and solar cells. In early 2009 this business was in stall mode. Revenues dropped to $1 billion for the quarter ending April 26, 2009 (AMAT's 2nd fiscal quarter).

In the first calendar quarter electronics sales were down, and chip manufacturers (fabs) thought had too much capacity. The only reason to buy equipment from Applied Materials was to stay on the upgrade path to new technologies, in particular smaller feature sizes.

Lately all the talk in the computer and electronics industry is about supply constraints. The fabs don't have enough capacity for the newest technologies that are in demand. Just for instance, neither AMD nor NVIDIA has been able to get the new high-end graphics chips in quantities desired.

So fabricators in Taiwan and elsewhere are trying to catch up to the curve. So much so that by the time Applied reported its latest earnings (on February 17 for the quarter ending January 31) revenues for the quarter were $1.85 billion, and net income was $82.8 million.

Guidance given on February 17 was for fiscal 2010 revenues to be up 50% over fiscal 2009 revenues.

But it gets better. Semiconductor chip manufacturers are ordering even more broadly just in the last few weeks. So yesterday Applied Materials increased its guidance. It expects fiscal 2010 revenues to be up over 60% from fiscal 2009. Leading the charge is the silicon manufacturing equipment division, which is expected to be up 120%. Lagging is the solar division, which is expected to be flat to slightly up.

Predicting the future is a dangerous business, but they it is a business I am in. Silicon is coming in quantity to nations like India, China, and Brazil in never-before seen quantities. Applied Materials is one of the few companies with the capital and expertise to keep pushing the limits on shrinking the size of the components on the chips. After minimal upgrading in 2008 and 2009, now through at least 2012 should be a major upgrade and expansion cycle for fabs.

There are small electronics and software companies that will grow faster over this period, but Applied Materials right now is both a value and a growth stock. It pays a dividend, 1.78% at this moment's stock price of $13.71. You will probably get most of your returns, however, out of stock appreciation.

I am a long-term AMAT investor.

Keep diverified!

See also my fiscal Q1 2010 Applied Materials analyst conference summary
And of course www.appliedmaterials.com

Oracle, Databases, Verticals and Business Intelligence

Oracle (ORCL) reported on its third fiscals quarter ending February 28, 2010 last Thursday. Along with other technology companies with fiscal calendars and some guidance changes, all indications are that the quarter ending December 31, 2009 was not an anomaly for the industry. Both consumers and businesses are resuming their purchases of hardware and software. While some areas of the world are now lagging, particularly Europe, on the whole the increase in demand is broad based. The release an adoption of Microsoft Windows 7 as well as new PC CPUs from Intel and AMD is making the refresh cycle attractive for servers, desktops, and laptops. The high-end cell phone craze is just adding to the rally. With some exceptions, technology stocks are undervalued, but probably will remain in that state until more money comes out of bonds and into stocks.

I'd buy Oracle right now for myself if I had a larger portfolio and wanted another relatively large cap stock. I believe Oracle is going to continue to eat SAP's and IBM's lunch, and probably steal some of Microsoft's afternoon snack as well. Now that Sun has been swallowed by the great white whale, or shark, companies that make high-end database server hardware need to fear Oracle as well. In Thursday's analyst conference Oracle management explained that they are already tearing out the unprofitable parts of Sun, like commodity hardware, and focusing on ramping the profitable parts. Sun has impressive hardware; combining it with Oracle's databases and other enterprise software application packages is going to allow companies to get bundles of value for their most demanding applications like transaction management. The Oracle hardware system for this is called Exadata, and it may prove to be a giant killer. Coming soon is the integration of Oracles software packages in Fusion, with will have built-in, across the board Business Intelligence (BI).

Microsoft, of course, is a far more diverse company than Oracle. It has a gravy train in its Windows operating system that is still under no real threat from Linux. Its database system for businesses, SQL Server, is competitive at every level from the home office to the enterprise. But at the enterprise level, SQL Server's main advantage is ease of use and integration into the legion of Windows PCs on corporate networks. For truly big enterprises, Oracle has two major advantages apart from its database's quality. Oracle is able to target verticals, which are industry segments like oil, financial services, and biotechnology, in a way Microsoft cannot. It also has a broader and probably better set of applications that are enterprise-specific such as ERP (enterprise resource planning). Oracle does not need to compete with Microsoft Office, and Office is just not that big of an edge when an enterprise is looking at something like a transactional database to deal with Internet content provision and commerce.

See also my Oracle analyst conference summary for fiscal Q3 2010 and www.oracle.com

As I write, according to Nasdaq, Oracle stock is trading for $25.36 cents, giving it a (non-GAAP) P/E of 16.6 and a forward P/E of 13.6. Which equates to annual earnings on investment of 6% and 7.35%. Which, however well it compares to other technology stocks, is way, way better than being in bonds, which are particularly unsafe now since any increase in interest rates will cause the sale value of past-issued bonds to fall.

But do Keep Diversified!

Red Hat (RHT) Virtualization Signal

Red Hat (RHT) continues to be not only a fascinating technology company, but a fascinating experiment in investor psychology. It has always been a good company for its customers, who benefit from its enterprise quality, low cost operating system, virtualization, and middleware. Yet the stock began highly overvalued during the first internet stock boom, became vastly undervalued in the crash that followed, and only in 2009 became somewhat overvalued again.

Yesterday's release of results for the quarter ending February 28, 2010, were quite good compared to realistic expectations, but investor's expectations were not reasonable. With Red Hat stock trading today with a Non-GAAP PE (price/earnings) trailing ratio of 41.4 and 40 times future earnings (per NASDAQ.com), meeting investor expectations was an unlikely scenario. You need faster sequential and annual growth rates to justify that kind of PE in this market.

On a GAAP basis, revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter. Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier. EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.

If the stock were at a reasonable price, those would be good numbers. But emotional investors who do not understand the technology market perpetually convince themselves that Red Hat is the next Microsoft. There is a big difference between being a great company in a niche and being the next Microsoft.

For the details you need to make your own analysis of the value of Red Hat stock, see my Red Hat Q4 2010 analyst conference summary and past summaries.

I have owned Red Hat stock at times; I currently do not own any. If sentiment shifts again and Red Hat becomes undervalued again, I might become a buyer. This in-and-out goes against my main line of investment thinking, buying undervalued stocks and holding them for the long term. But most of the stocks I invest in are not as volatile as Red Hat has been.

Compare Red Hat to Marvell Technology (MRVL). Marvell revenues in the quarter ending January 30, 2010 were up 65% y/y and 5% sequentially. Even taking into account the different business models (Red Hat income is subscription based, so steadier), it is reasonable to expect Marvell revenues and profits to grow faster than Red Hat in 2010 and 2011. Yet Marvell is trading at only 21.4 times past earnings and 13.9 times future earnings. Note that I own Marvell stock. But look at the PEs of other Nasdaq 100 technology stocks and you will see what I mean. Even Apple, which I frequently diss as overpriced, has a trailing PE of just 28 today; certainly no bargain, but not unreasonable.

There are a lot of technology stocks that offer better value than Red Hat right now. That is not because they are necessarily better companies (though some might be); it is just because of their relative stock prices.


More data:


http://www.redhat.com/

http://www.marvell.com/

Adobe (ADBE) Illustrates Tech Spending Revival

Adobe (ADBE) held its first quarter fiscal 2010 analyst conference yesterday and reported generally good numbers. Revenue was $858.7 million, up 13% sequentially from $757.3 million and up 9% from $786.4 million in the year-earlier quarter. Earnings per share (EPS) were $0.24, up sequentially from negative $0.06, but down 20% from $0.30 year-earlier. (See my Adobe Q1 2010 conference summary)

Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.

I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.

Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.

Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.

In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.

2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.

I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.

Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.

Dot Hill Potential and Pitfalls

Dot Hill, which makes data storage equipment sold by HP, NetApp, and other OEMs, is a very interesting story these days. If you were to just look at the numbers, you would think the stock price is too low. If you know its history of of always seeming to find its way to losses out of the jaws of profits, you can understant the lack of investor enthusiasm.

I think management has been making the right moves, but we probably won't see the proof (or disproof) of it until 2011.

Dot Hill makes hard disk arrays for business class data storage. This is not a high margin business. In the latest quarter ending Dec. 31, 2009 revenues were $62.6 million, but cost of goods sold was $53.6 million, leaving a gross profit of $9.0 million, or a gross margin of just 14.4% of revenue. Even though the the company is run efficiently, spending only $3.1 million on marketing, $6.8 million on research and development, and $2.6 million on general and administrative, this led to an overall GAAP loss of $5.0 million in the quarter. Take out a $1.5 restructuring charge and some non-cash costs and the non-GAAP loss was still $3 million.

As I said, this kind of near-miss has been going on at HILL for as long as I can remember. So why do I own the stock? Partly because I have been buying on dips, but there is also a long-term method to my investment.

First, Sun used to be the only major client, but Sun bought its own storage company and is now being absorbed in Oracle. Despite revenues from sales to Sun being less than 1% of revenue, this change did not lead to Hill's demise. Hill designed storage arrays that NetApp and HP are very happy with. If not for the recession, Dot Hill might have been profitable in 2009. I believe revenues will ramp in 2010, partly from more OEMs coming on board. Even if gross margins don't improve, it should become easier to cover operating costs out of gross profit.

At least as important is Dot Hill's determination to raise its gross margins. The main way this will be done is by selling software to manage the hardware along with the hardware. They have already begun doing this, but they are also acquiring Cloverleaf, which has the right software for this job.

Of course acquiring Cloverleaf will take some cash, and operating expenses will go up as well. More sales expense and more R&D expense will preceed the bulk of the software revenue. The next two quarters probably won't look that great. But hopefully by Q3 or Q4 of 2010 we will see software revenues ramping appreciably. Software revenues should have gross margins above 60%, maybe well above that by 2011.

If the scenario works out, that would change the picture entirely. Dot Hill would still have roughly $50 million in cash with no debt. It should hit a revenue run rate of over $300 million per year by the end of 2010. And with improved gross margins, it should start generating a profit. I see no reason why a 4% operating profit on revenue can't be achieved in 2011.

So what would that make the company worth? A lot more than the $81.6 million in market capitalization (at $1.51 per share) that Dot Hill ended today with.

But this scenario has its risks. Will the end users accept the software? Could HP or NetApp drop Dot Hill for a different supplier? Will more OEMs sign up? Will the economy hold up?

If you are going to invest in risky stocks, no matter how golden the upside looks, remember to:

Keep Diversified!

More data:

www.dothill.com
My Dot Hill main page
Q4 2009 Dot Hill analyst conference summary

Marvell Sees Inflection Point

Marvell Technology Group, Ltd. (MRVL) is led by Sehat Sutardja, who built the company on his invention of a better chip to enable hard disk drives. Marvell has been the leading (by market share) supplier of hard drive controller chips for years, and this segment still represented 50% of revenue for the latest quarter. Marvell has also branched out to a variety of newer areas, based on its ability to combine analog functions and digital functions on a single chip (called SoC, for System on Chip).

Marvell was hit hard by the recession: in fiscal Q4 2009, ending January 30, 2009, it had $512 million in revenues, down from a peak of $843 million in the quarter ending August 2, 2008.

Last week Marvell reported for fiscal Q4 2010, ending January 30, 2010, revenues of $842 million. GAAP net income was an amazing $205 million; cash flow from operations was $281 million.

But the future, while speculative, could be even more amazing. Sehat referred to a coming inflection point. An inflection point on a curve can be from going down to up or vice versa, but in this case he is talking about a dramatic increase is Marvell's revenue growth rate.

As I have pointed out in the past, Marvell spent a lot of money on research and development in the earlier part of this decade, and only cut back a little during the recession. This year new products that were sampled in 2009 are ramping into volume production, and new products sampling this year are going to ramp in 2011. What are those new products?

Most notable are "communication processors" for smart phones, particularly the oPhone beginning to be sold in China. In order to get a price point low enough for mass marketing in China, more features than ever before had to be integrated into a single semiconductor chip. Marvell is unique in being able to offer general application and signal processing, Wi-Fi, Bluetooth, graphics, and cellular modem. Over 90% of oPhone models (there are several companies building them) use Marvell chips.

This alone could be sufficient to cause the inflection point. While the oPhones are far less expensive than models sold in the U.S., Marvell gets very good profit margins on the chips it makes for them. Start multiplying these per-chip margins by the 100s of millions of likely oPhone buyers in China, and you can see the potential.

But there is more. Marvell has become an increasingly prominent player in high-speed Internet switching chips. The competition there is intense, but intense competition has not impeded Marvell for very long in other fields it has chosen to enter.

Many of the newer products will be based on a microprocessor line called Armada. The thing about Marvell is that unlike Intel, they usually don't just make a microprocessor and sell it to customers who put it in a socket. Marvell works with manufacturers to integrate exactly what they need for their products on a single chip that incorporates the microprocessor. This gives faster execution and communication times and reduces costs, while leaving Marvell an ample profit margin.

Expect new products to be announced based on Marvell technology all though 2010 and 2011 (and likely well beyond).

While competition is intense and there are many pitfalls, it looks to me like Marvell is going to become the very center of the semiconductor chip industry during this decade. Of course others have already entered the SoC business, and stand-alone chips will continue to be manufactured for equipment with volumes insufficient to justify an SoC design. I'm not saying the engineers at Intel, AMD, NVIDIA, Broadcom, Microchip, etc. are not very good, and all these companies have plenty of financial ability to compete however they like. But Marvell seems to have found how to

I have owned Marvell stock since January 2005.

For detailed results from Marvell's latest reported quarter, see my

Marvell Technology (MRVL) Q4 2010 analyst conference summary

See also www.marvel.com

I Sell Petsmart (PETM)

Yesterday I sold my Petsmart (PETM) stock. This is not because I think anything is wrong with the company, or that the stock is overvalued. When I bought PETM on October 8, 2009 [See I buy Petsmart] the price was $22.31 per share. I thought that grossly undervalued the company. Since Petsmart pays a dividend, I bought it for diversification against my technology-heavy portfolio, with a view to long term gains. For some reason PETM had not seen the stock price appreciation in 2009 that others had.

That changed after Q4 2009 results were reported. I was able to sell the stock for exactly $30.00 per share. That gave me 34.5% appreciation in a few months. I had less cash than I had wanted in my account; now I have cash for some other bargain.

In fact I bought a little bit more Dot Hill today, as it was having a fire sale after investors misinterpreted HILL Q4 results and plans for 2010. That is a more complicated story, and a riskier company, than Petsmart; I hope to write it up in the next few days.

I think small, independent investors like myself, who are good at research and analysis, usually do best with longer term investing. Since I would have been happy if PETM had appreciated 34.5% over a three year period, in a sense I did keep it for a long term.

The bargain basement is thinning out pretty fast these days. I am keeping my eye open for companies that I think will grow revenues and profits nicely over the next one to five years, but have low P/E ratios today. Mostly that will be small and medium capitalization stocks these days, but wait long enough and you will find that on occasion even large cap stocks are mispriced (both over and under) by institution investors and those crazy computer black box trading programs.

More data: www.petsmart.com
Petsmart Investor Relations