MorningWord 2/14/13: Why Buy The Cow When You Can Get The Milk For Free – $MSFT

by Dan February 14, 2013 9:24 am • Commentary

MorningWord 2/14/13:  The Desktop Operating System battle btwn AAPL and MSFT has been raging for over 2 decades.  While a clear winner had been determined, the war for mobile supremacy has left the once victor, MSFT, in the dust.  Former upstart in desktop computing, and early category definer in mobile, AAPL, is now grappling to maintain early mind and market share against an OS that is spreading like a virus the world over, Android.  The mobile OS arms race is looking increasingly like a two horse race btwn AAPL and GOOG’s Android, leaving a widening gap btwn the haves and the have nots.

The have nots (MSFT, NOK, HPQ & DELL to name a few) are scrambling like rats on a sinking ship.  A couple weeks ago, MSFT agreed to pony up $2billion to help one of their important hardware outlets, DELL, go private, with the obvious intent to fortify their beachhead at the struggling PC/Server maker, and do their best to exclude other operating systems, like Android, from future product offerings.  This is an interesting move by MSFT to say the least, especially at a time when the cash hoards of large tech companies like MSFT and AAPL have become a focus of investors.  MSFT has had a habit of throwing their cash around for acquisitions when they need to, $6 billion for aQuantative in 2007 and $8.5billion for Skype in 2011, and obviously their failed $40+billion bid for YHOO in 2008.   Last year MSFT wrote off the entire purchase price for aQuantative, the Skype deal is also likely to be a bust, and the YHOO deal was the miss of the millennium.   MSFT has sucked at large acquisitions, and other tech big wigs know that it is hard to do these sorts of deals. But where they have been bad at acquisitions, maybe just maybe they have done well by the expression, “why buy the cow when you can get the milk for… close to free?”  

As AAPL investors set their sights on the company’s $137 billion in cash on their balance sheet, AAPL’s management could take a page out of MSFT’s playbook (while avoiding large acquisitions) and consider ways to throw their cash around to shore up their external ecosystem in their battles with Android (like the DELL investment).  MSFT has been very active on this front, investing their cash in the lesser of 2 evils in most cases.  Over the last few years, MSFT has invested in or inked deals with many so called competitors.  In 2011 they struck a search partnership with YHOO to fend off the GOOG threat; also in 2011, signed a broad reaching partnership with NOK to ensure the use of their Mobile OS on at least one hardware platform, last year  they made a $300 million investment in Barnes & Nobles Nook eBook division to fend off AMZN, and back in 2007, they invested $24o million investment in FB as they hadnt had a clue of what to do in social media.

While Steve Jobs was in the record for saying MSFT “had no class” and their products are “unoriginal”, I wonder how he would view their survival techniques, and whether AAPL may be in a similar spot in 3 to 5 years, making the same 3 or 4 products in a massively competitive and commoditized space.  I would suspect that we will see more alliances by the big players as the battle lines become increasingly difficult to discern.



MorningWord 2/13/13:  The path of least resistance continues to be higher, but the opportunities to make money on the long side appear to be looking less and less attractive from where I am sitting.  I have repeatedly stated over the last couple weeks that 1500 in the SPX appears to be a less than optimal entry point for putting new money to work in equities, even if we get a blow off rally to 1550. As a trader who tends to be somewhat contrarian and also focused on the vol market, this is becoming an increasingly difficult market to actively trade.  

We are doing our best to pick our spots in individual names with a gradual bias to lean short the broad market, but owning premium is just not paying in an environment where the 30 day realized vol in the SPX is 7.  If you have been long the right sectors (which we have not been), Financials, Homebuilders and Industrials, it appears the party may never end as their individual leaders have recently broken out to multi year highs on volume.  Sitting on your hands and waiting for some initial signs of weakness to “press the short” is a strategy that will take some patience and in most cases for those looking to fade the rally, it may be the most profitable thing to do until signs emerge that vol is set to increase.

The inverse relationship btwn the SPX and the VIX, while getting a bit stretched as evidenced by the chart below, is one that can remain this way for a while, and trying to catch the turn could be a game of persistence, while throwing good money after bad.

[caption id="attachment_22636" align="aligncenter" width="589"]SPX vs VIX since Feb 2006 from Bloomberg SPX vs VIX since Feb 2006 from Bloomberg[/caption]


A large tenet of my near-term bearishness is the very complacency depicted in the chart above, and I am not expecting an implosion, merely a 3-5% sell off as a reminder to investors that we don’t just go straight up.   The fact that traders like myself, CC and Enis sit here and can’t think of a single stock that we want to have long exposure in, at current levels, makes me anxious… some it may be the perfect contra-indicator, but I don’t think so.

On a lighter note I saw Mumford & Sons again last night at the Barclays Center in Brooklyn.  Here is a clip I took of them performing The Cave during their encore.


MorningWord 2/12/13:  This morning JPM downgrades their rating on QCOM from Buy to Hold, as they feel 2013 will mark the tipping point for smartphone adoption and they will ultimately see growth grates slow and margins decline.  If AAPL’s year over year margin decline in Q1 (down nearly 10%) is any indication, this is a trend coming to a theater near you for the smartphone supply chain.   I would add that a market share and technology leader like QCOM is likely to be far more insulated from these pressures than an OEM.   BUT it makes a lot of sense for investors who have been involved in the secular trend towards smartphone to keep a close eye on saturation, and probably not wait till AAPL & Samsung have sold their last iPhone 6 or Galaxy 5 to the last human who can afford one to lighten up on their bullish thesis on the space.  Widely followed blog had a great chart last month showing the trajectory of smartphone penetration (below).

U.S. Smartphone Penetration Courtesy of Asymco
U.S. Smartphone Penetration Courtesy of Asymco


While Smartphone bulls will agree that North America and Western Europe are not where the next leg of growth will come, it is hard to argue that margin pressure won’t become an issue in emerging markets despite what could be decade long penetration process.

As for QCOM, I have been waiting to buy on a pullback to the low 60s.  There are very few large cap stocks that have expected earnings and sales growth of 10% and 20% respectively that trade slightly above a market multiple.  QCOM has a rock solid balance sheet with almost 25% of their market cap in cash, pays a dividend with a yield of 1.5% and has a monster share buy back.  All of this should help the stock weather broad market weakness, but not likely to help in the event of secular smartphone slowdown.  So I reiterate, if 2013 will be an inflection year for the smartphone industry, timing of investments will be very important.

As for the downgrade, I would note that JPM analyst Rod Hall did something that I have not seen in a while, an analyst being preemptive about his rating and price target (he saw little upside to his $70 price target and no reason to raise estimates to justify a continued Buy, so he goes to hold…..bravo…time will tell if he is right).   For the most part, Wall Street vets will tell you that price targets and ratings don’t matter, and for the most part I agree. Except sometimes they can be a decent indicator of impending sentiment shifts.  QCOM is one of the most loved large cap tech stocks among sell side analysts, with 41 Buys, 4 Holds and 2 Sells, for comparison sake two other well loved tech stocks have a bit more sell-side caution, GOOG has 28 Buys, 15 Holds and 1 Sell and EBAY with 30 Buys and 12 Holds, No Sells.  So the point here would be is Hall’s analysis and near term cautious view an outlier or the start of a trend that could weigh on QCOM shares?





MorningWord 2/11/13:  I think it is fair to say that Q4 Technology earnings were a mixed bag, for instance semiconductors heavily exposed to PCs struggled (INTC), while those exposed to smartphones & tablets flourished (QCOM), smartphone manufactures still trying to hold onto every last once of margin (AAPL) felt  market share pressure from those looking to undercut on price with broader offerings (Samsung & GOOG).  While these trends have been emerging for the past few quarters, they are likely to continue for the foreseeable future.  

With most companies have just reported trailing results and given at least guidance for the current quarter, most investors would likely expect to be in a bit of quiet period until we get towards the back end of Q1 and we get into “pre-announcement season”.  This week is likely to be a bit of an anomaly as Goldman Sachs hosts their anual Technology Conference with some VERY notable key note addresses throughout the day on Tuesday; Tim Cook CEO of AAPL on Tuesday at 4:15pm et, YHOO’s CEO Marissa Mayer 3:30pm et, EBAY CEO & John Donahue at 11:10am (full schedule below).  It is likely way to soon for any business updates since all three company’s gave Q1 guidance in the last 3 weeks, but it does give companies like AAPL and YHOO the opportunity to speak to the institutional investment community directly about recent cash management concerns in AAPL’s case or a broader sense for a turnaround at YHOO.

While I don’t expect too much market moving commentary, I would expect managements to highlight recent successes and do their best to soften the rhetoric around disappointments.  In AAPL’s case, I wouldn’t expect too much additional commentary centering on their plans for cash return to shareholders after the company’s very public statement on Thursday that they were considering additional options prior to their shareholder meeting on Feb 27th.


Here’s the full schedule: