Thursday, May 28, 2009

Celgene Growth Outlook

2008 and 2009 look like good years for speculators willing to try to sift babes from bathwater. One of the babies, in my opinion, is Celgene, a biotechnology stock.

Celgene (CELG) is one of the few stocks whose price has held up relatively well during the recent meltdown. At the beginning of 2008 it was selling at roughly $47 per share. Today it well over $41 per share. In between it hit a low of $36.90 and a high last August near $77 per share.

Once Celgene was a high-multiple stock, and today it is trading at a P/E of 25.5 excluding special items. Two years ago that was not a high multiple, but in today's market it is. You can argue for buying stocks with lower multiples if they are growing revenue and profits; there are lots of choices out there today. So why buy Celgene at this price?

Celgene's latest quarter reported, the first quarter of 2009, showed revenues of $605 million, up 31% from the year-earlier quarter. Net income was $163 million, compared to a loss year-earlier.

Can that growth be sustained? Q1 2009 did show a 4% sequential revenue decline from Q4 2008. That might be the beginning of the end, but management attributes it to inventory management by pharmacies and a negative currency exchange rate impact.

Stepping back, the curve looks to continue to trend strongly upward. Right now Celgene stands on three legs: Revlimid, Thalomid, and Vidaza. Thalomid for multiple myeloma has some short term growth potential since it is launching in Europe. Revlimid, a newer analog, is approved for treatment of multiple myeloma and some kinds of myelodysplastic sysndrome. It is relatively new on the market, and new clinical data of a positive nature continues to be released. So it is gaining market share and being introduced in new countries.

Vidaza is also for myelosyplastic syndromes, or MDS. Management claims it is the only MDS therapy to show an actual survival advantage. If that claim holds up, Vidaza sales should ramp rather nicely.

For now the currently approved drugs should keep Celgene growing at a good clip. The big potential future value of the company is in its pipeline. Of course, many promising pipeline drugs end up not getting FDA approval, or failing in the market even if approved. Celgene has a variety of therapies undergoing clinical trial.

Apremilast for psoriatic arthritis completed its Phase II study. Results are expected soon. It is also in a Phase II study for psoriasis and is being tested for other inflammatory diseases.

CC-930 for serious fibrotic diseases completed Phase Ib dosing study. Azacitidine for hematologic malignancies initiated Phase I/II study. PDA001 Phase I study for Crohn's Disease is now enrolling. Amrubicin for SCLC is enrolling both Phase I and Phase II trials.

In addition several Revlimid for CLL (chronic lymphocytic leukemia) trials continue.

The worst case scenario would be if all the new therapies fail to get approval and if the current drugs get knocked out of the market by some competitor. I don't think that is very likely, but it is a good idea to consider worst cases before you invest. I already own some Celgene stock, and have no plans to buy or sell at this time.

For a higher level of detail, see my Summary of the Celgene April 30, 2009 analyst conference.

And keep diversified!

Thursday, May 21, 2009

Akamai Future Trends

Does Akamai have what it takes to make long term investors happy even after this recession ends and stock prices go to normal levels relative to fundamentals?

I am not sure. Akamai accelerates the Internet. They are good at it. They have a technological edge over all rivals. I would not be surprised if the size of Akamai, measured in terms of revenues or net income, is ten times today's ten years from now. On the other hand, we are going into uncharted terrain where you can't just draw a line on a graph and assume it will rise linearly or exponentially forever.

It does seem likely that Internet usage, measured in bits delivered, will continue to grow for the foreseeable future. But it might not. Much of the growth in the past ten years has been driven by the shift to bandwidth intensive applications. Sending a text email over the net involves shifting a few bits. Sending a small image as an attachment with the email can increase the number of bits by an order or more of magnitude. Audio and high quality still pictures require another order of magnitude or more of data transfer. The short videos made for tiny windows of a few years ago upped the stakes yet again.

The number of people using the Internet, however, no longer climbs at the dizzying rate of the 1990s. Most of the growth in new customers now comes in developing countries. In some nations, like the U.S., the failure to provide a comprehensive broadband infrastructure has also put a damper on Internet data transfer growth. You can't do much with video when you access the net with a dial-up modem connection. But to the extent people start expecting DVD quality or HD quality video over the Internet, we still have a long way to go in increased bandwidth.

Your guess is as good as the experts. My guess is that it will be at least five to ten years before Internet growth rates really flatten out.

So if Akamai maintains market share, we can look forward to a good decade. What are the chances Akamai will gain or lose market share?

It is easy to see Akamai gaining market share. They simply accelerate Internet delivery faster than any other company can. Right now. You don't want to run a major merchant web site right now without Akamai's help.

Akamai is also starting to have better penetration outside the U.S. That alone could be a major growth driver.

On the other hand, plenty of would-be competitors exist. Most are losing money, but some may reach the inflection point where they have enough customers to make money. The really big companies that are well-situated to compete with Akamai are Cisco and Oracle. Cisco, in particular, probably possesses the skills to do well in the Web acceleration business. But Cisco has a lot of other fires burning right now. Akamai is thriving on specialization.

So I would judge competition to be a threat, but not enough of a threat to bet against Akamai staying on top for at least the next few years.

How did Akamai do in the latest quarter?

Revenue was $210.4 million, down 1% sequentially from $212.6 million and up 12% from $187.0 million year-earlier.

Net income was $37.1 million, down 9% sequentially from $40.5 million, but up slightly from $36.9 million year-earlier.

EPS (earnings per share) were $0.20, down 9% sequentially from $0.22, and flat from $0.20 year-earlier.

Cash from operations was $90.5 million, up 3% y/y. The company held $848.5 million in cash and equivalents at the end of the quarter. There are $200 million in convertible notes outstanding. Capital expenditures were $25.0 million.

See my Akamai Analyst Conference Summary of April 29, 2009 for a higher level of detail.

Akamai Investor Relations page

My Akamai main page

Tuesday, May 19, 2009

AMD: The Dream Renewed

Lately there has been an uptick in the price of AMD stock following news that the European Union will fine rival Intel some $1.44 billion for illegal anti-competitive practices earlier this decade. This lends credence to the AMD v. Intel lawsuit in the U.S., which could result in billions of dollars of damages being awarded to AMD. AMD's market capitalization even after the recent run up stands at less than $3 billion, largely because it has been years now since it has shown a profit.

We probably are not at a the start of a new era, for reasons I will give shortly, but consider the possibility that AMD is going to emerge as a financially strong competitor to Intel in 2010. Intel would have to be prevented from using its substantial cash reserves to force AMD into another price war that would keep AMD from making significant profits. AMD would then be free to continue to introduce superior technology as it did earlier in this decade, only going forward it would be competing in a free market where computer manufacturers could incorporate AMD products into their designs without being threatened by Intel.

What happened earlier in the decade with AMD's technological innovations is instructive. AMD, which had mainly made Intel CPU clones until 2000, made three major design changes that rocked the computer world.

First, Intel had decided that the switch from 32 bit to 64 bit computing would be made by segmenting those two markets. If you wanted to do 64 bit computing the Intel way, you would have to switch to Itanium processors, and your old software would not work on those new processors. At the low end you would stay on the 32 bit road map. Intel ignored feedback from its customers that they wanted chips to run 64 bits on the old 32 bit instruction set, making them capable of easily running older software, and allowing for software makers to easily design 64 bit software. AMD listened to customers and introduced chips that could run both 64 bit and 32 bit software. A lot of people liked that.

Second, AMD introduced HyperTransport, which fixed a major bottleneck in Intel chips that prevented data from being moved from the CPU to memory, other CPUs, or other devices. Only this year, in 2009, did Intel introduce a similar feature in its processors.

Third, AMD's design took into account the problem of energy consumption and overheating of chips. Intel's plan was to make chips run ever faster, with no major changes in architecture, but fast meant hot. AMD changed the architecture to get just as much performance from its chips, but using less energy and running cooler.

The Opteron chip for servers incorporated all of these features, and for a couple of years steadily gained market share. Of course, AMD had almost no server market share before Opeteron. The same features were introduced in AMD Athlon chips for personal computers.

In 2004 I thought AMD was going to blow Intel out of the water. I thought the natural conservatism of the IT community would be overcome by the clear demonstrations of AMD's better technology. But in addition to AMD's need to build credibility and overcome the close relationships Intel had with manufacturers, it ran up against Intel's war strategy.

Internally, we now know, Intel admitted the AMD processors were better designed. Externally, Intel used three classic tactics: it used its massive ad budget to create the perception that its products were still superior; it lowered its prices so that AMD could not generate the profits necessary to maintain its process development efforts; and it used well-documented illegal and unethical tactics to keep manufacturing partners from using AMD chips in their designs.

Then, gradually, Intel followed the AMD roadmap. They started making greener chips that had the 32/64 architecture. Finally, they licensed AMD's hypertransport technology and built their own take on that into their chips. Given all that, with Intel's admittedly superior manufacturing capabilities (they can make smaller transistors than AMD, and so get more into similarly-sized chips), today it cannot be said that AMD has any kind of clear technology lead.

In retrospect, Intel used its market dominance to punish AMD for innovating. Prior to the described era of competition, Intel was quite happy to set extraordinarilly high prices for processors. AMD's clones were cheaper (and a year or two behind in design and process technology), but still profitable. If AMD had been content with 10% of the market, Intel would have kept it prices high, in turn guaranteeing AMD profits. It is almost universally acknowledged that Intel wanted to keep AMD alive and profitable, if not really competitive, simply to have plausable deniability to charges of running a monopoly.

Consumers were helped by AMD's technology innovations, but AMD stockholders lost out.

Hopefully the AMD v. Intel lawsuit will sort all that out. Billions of ill-got Intel profits should be rewarded to AMD.

Given the two corporate cultures, I suspect AMD has a roadmap that is in many ways superior to Intel's. To execute on the roadmap, however, they need money, and they need to know that Intel is not going to engage in ongoing anti-competitive practices.

AMD has at least one trick up its sleeve that should be played soon. It has a graphics division that is vastly superior to Intel's. Intel is pouring money into its graphics design division, hoping to catch up before it loses the lawsuit and AMD has the money it needs to pursue its vision of CPUs that do what clients want, rather than what Intel dishes out.

Disclaimer: I own some AMD stock.

See also my main AMD investor page at

Wednesday, May 13, 2009

Applied Materials Segment Performance Varies

Applied Materials (AMAT) is on the ropes. Fortunately it has large cash reserves. It is still paying a dividend (about 2% at this stock price). And it should bounce back when (or if) the global economy starts to recover.

The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.

Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.

There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.

What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.

New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.

The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.

The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.

The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.

The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.

Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.