Thursday, February 24, 2011

Hansen Medical, Onyx Pharmaceuticals Report Q4

On the Biotechnology front:

Yesterday medical robot maker Hansen Medical (HNSN) reported its Q4 2010 results. See my Hansen Medical Q4 2010 analyst call summary.

Also Onyx Pharmaceuticals (ONXX) held its call. See Onyx Pharmaceutical Q4 2010 analyst call summary.

Neither company was profitable for the quarter. Onyx is investing its Nexavar profits in more clinical trials for Nexavar and in bringing carfilzomib for multiple myeloma to market. Hansen, after the quarter ended, received a large royalty payment from Philips which should fund its development of its experimental robotic catheter for vascular procedures. Hansen hopes the new vascular robots will receive approval this year. If that happens this $2 stock could be a $20 stock by the end of 2012.

I own both stocks.

See also the company home pages:

Hansen Medical
Onyx Pharmaceuticals

Monday, February 21, 2011

Random Walks versus Purposeful Forays

The March 2011 Scientific American includes "Financial Flimflam" by Michael Shermer, subtitled "why economic experts' predictions fail". But it is not so much about economic predictions as about the theory that index funds are a better investment than managed funds. He claims the market average return in 2010 was 2.5% higher than the average of the ten largest managed funds.

Index funds, of course, have their own perils. A lot of people bailed out of their index funds some time in 2008 or early in 2009, as a sort of stop-loss measure. Then they missed the market runnups in later 2009 and in 2010. Thus gutting their retirements.

Since I do my own research and make my own investment decisions, and also get paid to do specific research and analysis by a fund manager, I think it is fair to wonder if I might be better off just buying into an index fund like so many other people and institutions.

Lately I have had an extraordinary rate of return because my portfolio contains only 15 stocks, and those include 3 with extraordinary returns of late: TTM, the Printed Circuit Board manufacturer; Dot Hill, a storage company, and Dendreon, the maker of Provenge for prostate cancer. In the past I have had other stocks hitting extraordinary returns, but because I have tried a number of risky, turn-around, small cap situations, I have also lost all the money I invested in 3 stocks over the past decade. There have also been times when my stocks lagged the market. Partly this is because since I typically play Nasdaq 100, or smaller, stocks, so they typically go down more in down markets, but up more in up markets.

I agree that if you are paying someone to manage your portfolio, they need to beat the market enough to pay their management fees and then some. Otherwise you could do better by creating your own index fund. It is not hard, you could for example buy equal amounts of the Dow 30 and the Nasdaq 100 or S&P 500 or any other known set of stocks.

Still, there are people like Warren Buffet who had very long runs of better than average returns. That is not just luck.

Large managed funds have trouble beating the market partly because they are the market. Their individual stock positions are so large that their creating or leaving a position, or even trimming, moves stock prices. They also tend to be in a relatively large number of stocks, which again dilutes their performance back towards the market average.

To beat the market it really helps to play on a small enough scale that your buys and sells don't affect the stock price substantially.

It also helps to see the curve. Here I mean seeing more than the statistics we all tend to rely on, revenue growth and earnings growth and margins and cash. You need to see future value where others are missing it. You also need to be very serious about weighing risk. Truth be told, I thought Dendreon was riskier than Anesiva, but Anesiva went down with my investment, while Dendreon took me up by a factor of ten. If both had sunk, I would be writing a far gloomier story today. Interestingly, in addition to stocks with high risk levels, I always keep stocks with good potential for returns and relatively lower risk. Some of those stocks have performed badly for me, but none went out of business.

I basically doubled my money in the stock market during a period of time when the market went basically no where. I balanced my risks and made my mistakes, and have been better at avoiding mistakes lately. In retrospect, or course, I could have put every penny I had into Dendreon, but that did not look wise at the time. Backtesting is interesting, but you have to go with what you know in reality, at the time of investment.

On the other hand I do an enormous amount of research, considering the size of my portfolio. I don't just invest in biotechnology stocks; I study biology text books and journal articles. I don't just invest in computer technology, I do my best to keep up with the breadth of its developments. Also, I try to think like an owner of the companies I invest in. I like companies that invest wisely in the future and run a tight ship.

Frankly, unless you enjoy doing research, you are better off in an index fund. But if you are willing to do your homework (and it really is a lot of homework), you have a good chance of beating an index fund if you are an astute individual investor.

You should check out the Scientific American article because it has some other information, especially about investor psychology. I love this bit: "Being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation."

Above all, a smart investor looks most closely at the data that challenges current beliefs.

If you aren't familiar with it, see the Random Walk Hypothesis at Wikipedia.

Keep Diversified!

Thursday, February 17, 2011

NVIDIA Price Counts on Tegra Ramp

(original title: NVIDIA: Counting Chickens Before They Hatch)

As an analyst and investor, one of the main things I do is count chickens before they hatch. Today graphics chip specialist NVIDIA has a high price-to-earnings ratio (non-GAAP 62x trailing, 26x leading), indicating some investors are counting on a lot more chicken profits in the future than they have been seeing lately. Is this a smart assumption?

NVIDIA will have a profit boost for the next six years from its licensing deal with Intel. For the most recent quarter ending January 30, 2011 it booked $57 million for the litigation settlement portion of the deal (booked as a negative operating expense, not revenue). For each quarter it will book about $60 million in royalties.

Other than that, the last couple of years have been hard on NVIDIA. Q4 fiscal 2011 (the most recently reported quarter) revenues were $886.4 million, down 10% from $982.5 million in the year-earlier quarter. That does not sound like a high-growth company that deserves high PEs on its stock price. [for a fuller report on Q4, see NVIDIA Q4 fiscal 2011 analyst conference call summary]

What speculators are speculating on is a chip called Tegra. The first version was interesting but did not generate much revenue. The second version is available now in a few tablet and smart phone devices. It produced little revenue in Q4, but is supposed to contribute substantially to Q1. Therefore, instead of a normally seasonally down Q1, guidance is for a 6% to 8% sequential revenue ramp. That is impressive, if it happens.

In addition, the third version of Tegra, called Kal-El for now, is already sampling and is supposed to be in devices for sale for holiday 2011 shopping. Reviews of Tegra 2 are generally positive.

The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and ever servers.

Before you pay a premium for all them chickens, you might want to think about all the other chickens that will be on the market. NVIDIA's Tegra CPU unit is based on the ARM architecture, which anyone can license. The NVDA advantage is in graphics, but there are a number of companies that license graphics capabilities that were designed specifically to work with ARM. NVIDIA's were designed to work with the 8086 architecture of Intel and AMD.

Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.

When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phones than NVIDIA does; so does TI. Intel and AMD want to get into the game. AMD gained a lot of market share against NVIDIA in discrete graphics cards for computers during 2009 and 2010; their fusion chips offer some extreme advantages, especially for tablet computing. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
None of the other contenders have PE ratios as high as NVIDIA's. I have owned NVIDIA stock in the past, and if it had a low PE I might scoop up those chickens right now. I have always admired NVIDIA's technological skills, and the Tegra 3 is promissing. I don't see how it can be all that much better than competitors, however. Everyone has promissing designs, everyone is hustling to squeeze usability out of the same limitations of silicon.

I have done well recently with some hatchlings at Dot Hill, Dendreon, and TTM. On the other hand, I like to keep in mind Anesiva, where I correctly predicted its Zingo product would hatch (get FDA approval), only to watch it die a horrible death and then take the entire company into bankruptcy with it. The secret is to see them chickens before momentum investors drive up the stock prices. If you bought NVDA a year ago at $8.65 per share, congratulations. If you are thinking about buying it today at $25.48, you might want to consider that it could take NVIDIA a couple of years of outstanding growth to justify this price.

Tuesday, February 15, 2011

Akamai, Limelight Compared

Akamai Technologies' (AKAM) stock price plunged late last week after fourth quarter (Q4) earnings were released. Limelight Networks (LLNW) stock price jumped today after Q4 2010 earnings were released yesterday. That would seem to indicate that Limelight is the better stock deal.

Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers other value-added solutions like security.

Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.

Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.

Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.

The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).

I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?

Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.

All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.

I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.

From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.

Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.

See also: ;

Wednesday, February 9, 2011

Hansen Medical: Upgrade Due

Hansen Medical (HNSN) may be about to reach an inflection point. In fact, given the recent announcement of Philips paying $30 million to license just one part of Hansen's technology, we may be past the inflection point. While I have owned Hansen stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009, my analysis in late 2010 failed to take into account all of Hansen's future potential.

It is easy, in retrospect, to see the downward slope in expectations for Hansen. Back in say 2007 Hansen was the Next Big Thing in robotic medicine, on the same path to providing early investors with riches as Intuitive Surgical. HNSN traded above $30 per share. Then it became apparent that it would take some time to ramp up sales of its Sensei robotic catheter systems, which were approved only to make electrophysiology measurements. With the recession causing investors to shun risks, and system sales actually declining, you could (and I did) pick up shares for under $1.50.

While research and development (R&D) continued on new applications, you could say that the real value was in the future, when Sensei would have multiple purposes in hospitals. Yet sales continued to slump. For Q3 2010 only 3 Sensei systems were shipped to customers. GAAP net loss was over $12 million on revenues of just $3.5 million. My comment on Sensei systems was "Apparently until they can used in more procedures, hospitals are not that interested in them." Some hope smoldered with the idea that a company like GE Healthcare or Philips might acquire the company, given its miniscule valuation.

But now higher powers have validated the future potential of Hansen technology. The deal with Philips in no way gives away any technology needed to continue developing Hansen's own Sensei systems.

Hansen Medical is scheduled to report Q4 2010 results on February 23rd. Without a doubt the analyst conference will emphasize the Philips deal and the potential to start selling Sensei systems equipped for vascular surgery some time in 2011. Whether they shipped zero or ten Sensei systems in Q4, the real value is mainly in technology waiting to be commercialized. Hansen is still, fundamentally, in startup mode.

However, before jumping in, even at today's astonishingly low stock price ($2.07 as I write), keep in mind that the FDA (and the equivalents in Europe and elsewhere) must not just approve the new vascular application for Sensei Artisan catheters. It must approve use procedure by procedure. Once it is approved for one vascular procedure it can be approved more easily for others, but it is still a long, hard road ahead.

But if the road is uphill, at least the view from the top should be really, really nice. The potential vascular catheter robotics market is big, bit enough that, yes, it isn't all that wild to think of Hansen as a potential to be the next ISRG.

See also:
Hansen Medical main page
my other Hansen Medical articles and conference summaries

Thursday, February 3, 2011

Paint SGI Black: Stock Surge

Silicon Graphics International (SGI) has had a rough time the last few years. It is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. The release of results for the fiscal 2nd quarter of 2011, which ended December 24, 2010, showed that management has done what it takes to forge two losers into a winner. After years of losses SGI reported GAAP earnings of $0.12 per share and non-GAAP earnings of $0.44 per share. Right now the stock is up 24% over yesterday's close.

With governments now being the main purchasers of SGI computers, Q2 was an exceptional quarter, and the quarter ending in March will see a substantial sequential decline in revenue. However, the overall trends in 2011 should be up.

The transformation of SGI is about technology, sales, and profit margins. If you look at my earlier critiques of SGI & Rackable, neither company's gross margins were high enough to allow them to book profits after operating expenses. For a while Rackable had done well, selling superior, low-energy racked server systems, but then bigger companies started undercutting them based on price. The old SGI, on the other hand, was famous for spending too much on R&D and perks, so managed to lose money on cutting-edge tech.

Now we are seeing the difference between good management and bad. The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.

The company is now truly international, which is important when your key product is supercomputers. Service revenue is also a key factor in the new, profitable business model.

How high can SGI fly? It is really difficult to tell. In 2010 it was largely a Linux story, but now Altix UV it is certified for Microsoft's high end products, so revenues from that segment should ramp in 2011. SGI's management believes it can address a $3 billion annual market; revenues in the quarter were just $186 million, so there should be plenty of room to grow.

It is notable that SGI came through the transition with $111 million in cash and no debt.

For more details on quarter results, see my SGI Q2 fiscal 2011 analyst call summary.

See also: