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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
This is just a quick update on where we think the next logical surprise is going to come from regrading Facebook shares…(hint… its mobile and its positive)
Yes, there are lock up issues, yes there are valuation issues… and yes, Barron’s just ran a cover story basically summarizing every bearish bullet point since the IPO roadshow. Shares are down over 9% yesterday and down again today. If there was any materially new information on FB I would not be stepping in with an opinion since it is a dynamic story whose long term outcome is far from a sure thing. However, when you have a 9% move stemming from an article that regurgitates old information – and in fact faces off vs. positive rumors we hear about possibilities in ecommerce, search, and improved ad platforms then you have to look at this as an opportunity…to buy.
The Facebook IPO was a mess, so what. Yes, there was money gained and lost by different folks, but at the end of the day investors need to do their own homework. The sell-off was warranted. There are issues on mobile and desktop and valuation and its status as an ecosystem etc. But as sentiment gradually turned negative during the road show, it is now near 100% negative as shares have fallen over 40% since the opening of trading (Faceplant). That said, sentiment is now overlooking any and all of the revenue opportunities they may have…which are plenty – its just that none are developed yet.
I do see lots of issues with the FB model – the most prevalent of which is the very genesis of the site is for social interaction and information, not products or service related – which prompts the question how do you monetize a 900m person cocktail party? Not as straightforward as a keyword search for iPhones. That said, the FB model does offer unprecedented scale, data, and optionality on ways to monetize that data and scale that no other company has the opportunity to do. Therefore, when the shares broke under $20, it gets interesting.
The next surprise out of FB is likely to be a positive one. Growth in the core market is known. New subscriber rates slowing, ad click through rates terrible, and mobile is an albatross. However, FB finally launched a mobile ad platform, which means we go from zero to some positive number in mobile. Also, FB is actively trying new desktop ad methods. Lastly, they are moving towards an ad network, more targeted ads, ROI studies, and possible search and ecommerce revenue streams. The negatives are known – its the positives that may surprise. Use today as an opportunity to take a long position for at least a trade into a positive announcement.
Facebook pays $1.25b to help protect its Achilles heel
Once we get over the initial shock value of the Instagram purchase by Facebook, it is much more interesting to look at the why as opposed to HOW MUCH? Yes, Instagram was worth $20m only 14 months ago, $500m last WEEK, and now $1.25b (cash and FB stock w/ valuation $74b). Their user growth and activity levels are growing rapidly, they just added the app to the Android platform, they are a leading photo sharing site, AND they have users interacting OUTSIDE of the Facebook network. And that leads us to the why…
From a fundamental perspective there are four truths to consider: 1) photos are the leading activity on FB; 2) viral activity leveraging Facebook, Twitter, the mobile web and other social outlets has never been so pervasive or explosive; 3) mobile web activity will overtake desktop and laptops soon; 4) FB activity on mobile is fundamentally different and lower than on the desktop.
On the desktop FB is a platform, on mobile… just another app. There is a HUGE difference. On the desktop a users entire web activity and most of their time is through the FB platform. On mobile, they are just another one of the many apps consumers use to manage their mobile lives. In addition, the FB mobile app is cumbersome compared to others. Instagram is fast and elegant, Twitter simple, Foursquare simple. Yes, FB has more information and flexibility, but in a mobile world the whole point of the app is simplify. FB is aware of their limitations on mobile and is actively pursuing a mobile phone platform strategy and in the meantime is willing to buy competitors.
I want my, I want my…
The big difference in the adoption of any new technology, gadget, service, or any change really is the “total pain of adoption” (hat tip to Pip Coburn). What level of anxiety is relieved or caused by that change. Am I willing to change certain other aspects for the perceived benefit. We see this as an evolving issue in the privacy vs online world experience scenario. The world at your finger tips comes at a price particularly in the freemium model economy. The personalized experience we get on the web is a direct result of the ability to monetize our data stream, activity and potential for sale/upgrade. The privacy battle around that data is getting heated as more and more of our lives are spent and shared online. To the extent that consumers resist this intrusion, their experience will suffer. However, to the extent that companies overstep their trust, the same pain will be experienced in reverse. Security and privacy are very sensitive and convoluted topics. In general, people are willing to allow the data flow as long as the experience is enhanced. It is clear we need better tools to analyze the seemingly disparate data streams and enhance the experience; the old models are just not enough.
You want the world to be as open to you as possible…but at your discretion. If the web is to continue its evolution as part of our very human fabric, then the ability to turn on and off our privacy will be increasingly necessary. Yes, we want to share more, and by sharing data we improve our experience, much like entering a store and explaining what you want to improve the service…but, I also reserve the right for discretion and privacy – a very human feeling. This is as much about sensitive financial and health information as it is about what information I am sourcing and from where.
We anticipate that there will be more high level security breaches in the near future that cause consternation among regulators and consumers. One avenue we see as interesting in the future is the ability for a consumer to control, or even profit from the release of their personal information. Currently you get a discount on a product in exchange for the data, but you are not aware of what data they are collecting and how frequently. Think Google’s apps or Amazon’s $79 Kindle with ads. Instead, we see an opt in world where you are paid to provide accurate details regarding your habits and preferences in exchange for a fee and a more tailored experience, which could also include deals and ads that matter to you – like %50 off at a steakhouse instead of another spa treatment.
You see something you want to buy, done. You want to share something with one person or the entire world, done. You need information and to get something, done. The ONLY way to do that is with a smart device with dynamic security and privacy controls and high speed networks – otherwise the user experience is too subpar and will drive a negative feedback loop.
Positive: security software, data analytics, IBM, Splunk (private)
Negative: any privacy mishaps are bad for Google, Facebook and Apple
Note – of the three big personal data collectors, only Apple doesn’t NEED your info. Apple makes its money sell you devices, and takes a cut of apps and content. Google and Facebook rely solely on advertising and the ability to customize those ads to your data.
The Change Investor 