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The first two sectors for 2013 are beginning to overlap in a lot of ways – but for this purpose when we talk cloud we are focusing on providers and the data center while mobile is more equipment and service providers. In general, we continue to be positive on technology spending as a whole. There are not a ton of pie-expanding investments out there – tech spending is all about ROI now and the faster the better. Technology investments are enabling more efficient and nimble companies and helping profitability (and even morale in many cases). There are more themes and more specific niches to consider – but here are the major groups.
1) Cloud
a. Premise: I want what I want, where I want, on any device I want…
b. Delivery: leaders in the cloud services space are AMZN and GOOG. Names to watch: MSFT, RAX, CTXS, and HPQ (last hope). Specifically – CTXS, RAX, and NTAP get attention as acquisition candidates by Cisco
c. Data Center: the “cloud” is a generic term, but in general the idea of housing all of your data at remote data center and delivering it on a global basis instantaneously puts heavy demands on computing resources. The ability to cost effectively scale the data center and deliver speed is critical. Top names: EMC (has VMW and will spin out Data Analytics), CSCO, IBM
d. There are some consultant type plays that would include CTSH, IBM, SAP and ORCL
e. Salesforce.com (CRM) falls into the “cloud” and I love what they are doing, but the valuation, like Amazon, is difficult to digest. CRM represents the SaaS (software as a service) space which saw several M&A deals this summer. The recent darling IPOs are Workday (WDAY) for HR Solutions and ServiceNow (NOW) for cloud infrastructure management
2) Mobility
a. Premise: Freedom; flexibility, and the same premise as cloud only I want it NOW
b. Delivery: telecom networks are traditionally high div paying and we still think VZ and T are fair plays on sell offs – but nothing to be exicted about
c. Infrastructure: as the world seeks to build out 4G networks the lead players are CSCO, ERIC, …
d. Equipment: there are only 3 names to watch: AAPL, GOOG, Samsung. Hail Mary plays in RIMM and NOK
e. Components: QCOM, ARMH, BRCM
f. Mobile Ad Spend – the only pure play is Millenial Media (MM) – but the big guys to watch are Google, FB, and Amazon – Apple is trailing.
3) Data Analytics
a. Premise: the world is generating data on a exponential scale – but what does it all mean?
b. The only way to describe this space is to say there are lots of people working the solve the problem of extracting information from data – across nearly any end market – healthcare, utilities, retail, tech…etc. There are hundreds of small, private companies working on solutions –most are getting gobbled up by the bigger players: IBM, ORCL, SAP. This space is likely to see several smaller IPOs this year and many more acquisitions.
Niche to Riche?
1) 3D Printing – initial market for industrial prototypes becoming saturated – key to the story is first, low cost home/office printing. Second, improved material possibilities leads to new “mass customization” market: only two real public plays are SSYS, DDD – expect HPQ to try something (they currently license SSYS); Autodesk (ADSK) for software – they will be a part of this.
a. Unknown what Trimble may do – they bought the 3D CAD software from Google (SketchUp) – they likely want to integrate with construction GPS aided equipment but something to keep an eye on. We like Trimble as a productivity enhancement play for construction, agriculture and fleets
2) Social Networking – yes, overhyped and underdelivered in many cases… a lot of this has to do with the misconceptions of what these firms actually DO vs the optionality you are buying. Moving forward, LNKD and FB are interesting, they have the ability to monetize their users and to expand the optionality of their platforms. LinkedIn has an actual market, job placement, and is expanding its offerings. FB is facing lots of problems, the biggest being mobile. The good news is they were able to generate $3-4b in revs without trying – currently they are rolling out new services, revenue models like mobile ads and ad exchange networks at the fastest pace to date. YELP not working. Hail Mary in ZNGA on gambling legislation
3) Housing meets Data – Zillow (Z) and Trulia (TRLA)
Favorite large cap names:
GOOG, IBM, QCOM, ORCL, AMZN, EBAY, EMC, CRM
Turnarounds: MSFT (data center), INTC (servers), YHOO
SMID Names: high valuation – prone to blow ups but like the technology
FIO, FTNT, SPLK, WDAY
Press to Download Short Squeeze App
Following last week’s put action in HPQ and DELL today – the “the PC story is washed out” meme is in full swing. Now traders will begin with the activist investor shtick Ralph Whitmore of Relatinoal is already on the board at HPQ. He doesn’t own a huge stake, but agreed to not sell until 2014 in order to get on the board. Just for reference; our current range is $18-19 with a “buyout / split” worth mid $20s today. Fundamentally, there are no long only guys touching it… the moves now are deep value guys and traders taking a scalp. Its a matter of no more sellers right now… technically it reclaimed the 50 d moving average (with 200d MA above at $19) and short interest remains high. Other enterprise companies point to a weak but not worsening Q4 – so a more rapid deterioration in HP is possible vs. expectations but not likely given the carnage of last month.
- Recent launch of cloud initiate and issues with public outages at Amazon and Google may help prove HPs case for private / public hybrids… but also Cisco’s, IBM, EMC and others.
- Investor sentiment may be close to a bottom…from and email to a colleague
- This does not mean the company is no longer a value trap – but simply that a) long only tech investors are no longer involved and will not be until fundamentals show positive signs; b) individual investors are scared out of the name. The remaining investors are nearly all deep value players. This has led to a large volume of “top pick for 2013” and other bottom finishing calls. We agree that sentiment is washed out and this normally sets the table for sharp rallies. However, this does not eliminate the risk of HP being a value trap. We are very concerned about the issues facing HP and view the risk of a decline in core business for 2013 is very real. Expectations are low as cash flow guidance deteriorated, but as long as it remains above $5b for the year we see a fall only to $12-13 as possible even with low sentiment – with sharp upside given its underowned status.
As the HP turnaround drags on the question becomes
1) how much will business be impacted by scandal and perception
2) how large will the impact of secular issues facing printing and PCs be
3) how much cash flow can they produce without damaging investment
Investor sentiment is washed out… no tech or growth investor will touch it.. even deep value players are beginning to think twice. As I’ve written, I am no fan of HP and its sprawling business model and need to heavily invest in its future – an issue for protecting its cash flow. However, as it hovers around $14, up from under $12 following earnings and the Autonomy debacle, we reach a stage where the incremental downside requires serious degradation in the business. Recent quarters suggest cash flow near $4b on the downside, assuming little to no improvement in inventory management and working capital, and a continued decline in core business… which values the company at ~$24b in or $12.30… more realistically the number is $5-6b or greater next year (given all the levers) and at a more reasonable multiple it yields a stock of closer to $18-19 per share. Any stabilization in end markets, macro improvement, or actual improvement by HP would push it closer the the sum-of-parts value (including conglomerate discount of $23-24 per share.
The one red flag we will be watching is the make up of the cash flow – if they are cutting capex and extending payables its a big negative. If however, they continue to get their inventory issues under control – they will see a $500m-$1b positive impact, and the front end loading of restructuring costs should help the cash flow toward the second half.
Earnings of $3-3.50 and cash flow of $5+b should be enough to keep the shorts at bay and deep value in the name.
Given the secular issues we are not positive on the company – but have to respect that the pendulum of fear and negativity has swing too far. Path of least resistance is likely up from here.
The Change Investor 