Archive for October, 2007

China is big.
 
I’ve been enamored with China ever since I found out (many years ago) that there were more cell phones in China than people in the United States.
 
Was pretty easy to see that companies like Baidu (BIDU) were going to be something special.
 
China — and Chinese stocks — have been on an amazing tear.  For example, BIDU priced at $27, opened at $66, and now trades above $350… in about two years time.
 
But China is scary to most U.S. investors.  Too much like the Wild Wild West for our taste.  (BTW, that’s true on so many levels.)
 
So I think it came as a big surprise to many U.S. investors over the last few weeks that one of the year’s most hotly anticipated foreign IPO’s — Alibaba.com (1688.HK) — is almost 40% owned by America’s very own — surprise — Yahoo!.
 
How hot is the Alibaba.com IPO?  They had $100 billion in IPO orders chasing just $1.5 billion in IPO shares.  That’s red hot.
 
But, Yahoo! doesn’t just own almost 40% of Alibaba.com… they own almost 40% of The Alibaba Group, a holding company for a number of other important Chinese web properties, most of which are expected to come public in as equally a frenzied state.
 
What this all means is YHOO is now very much a Chinese play… especially for the U.S. investor that can’t stomach a direct investment in China.
 
And, it’s only a matter of time before U.S. investors realize GOOG is a Chinese play, too.  After all, Google is #2 (behind Baidu) in search, not an insignificant position.
 
And, didn’t Microsoft just report killer earnings, fueled in large part by international strength?  Let’s not forget Microsoft has been investing in China for years.
 
Bottomline:  Pretty much every major American technology company has a footprint in China… and that will pay big dividends, starting, well, right now.
 
P.S.  Re: YHOO:  At least initially, look for YHOO to have a taste of volatility as Alibaba.com (stock symbol:  1688.HK) goes through its inevitable gyration upwards.
The rise of after hours trading seems to be creating some market inefficiencies for companies that report after the market has been closed.
 
For example:
 
*  eBay (EBAY) traded up 5% in after hours trading when they announced recent earnings.  Stock was down 5% the next day.
 
*  Baidu (BIDU) traded as low as 9% down after hours after announcement.  Stock was up 6% the next day.
 
I don’t remember after-hours trading being this far off… maybe a new market inefficiency?
While we’re all cheering Microsoft — and they deserved to be cheered loudly for their blow out quarter — I’d like to put this in a more historical, reflective perspective.
 
Allow me to work backwards.
 
Friday was a pretty wonderful day for the tech sector.  The big catalyst was Microsoft.  Microsoft blew everyone away.  So many positives… but obviously the one that stands out — much to everyone’s disbelief and now chagrin — is heightened Vista adoption.
 
Now, Microsoft is not just your average tech company.  Microsoft is the tech mothership.  When Microsoft blows everyone away, it rains business on top of every single other company in high tech.
 
Guess we’ve all forgotten that since Microsoft hasn’t blown anyone away for quite a while.
 
But it happened on Friday.  Since almost every single investing person on the planet has some exposure to the technology sector — either by direct stock purchase, mutual funds, IRA’s, etc. — Microsoft’s phenomenal Friday will rain value creation on top of, well, every single investing person on the planet.
 
Mind-boggling to think about, actually.  Microsoft is truly more like a government — or a good old fashioned monarchy — in this regard.  An awesome responsibility.
 
Rewind 3-4 years… when Vista was supposed to ship.
 
The upgrade cycle everyone is enjoying today should have happened 3-4 years ago.  (And, today, we should be enjoying yet another upgrade cycle, call it Vista 2.0.)
 
But it didn’t.  Which means we got cheated out of an upgrade cycle… what smart folks know as the life blood of the entire tech industry.
 
So, no wonder the tech-heavy NASDAQ sucked from 2003-2005.  Failure to deliver Vista anywhere close to on time hurt every single investor on the planet.
 
That’s a pretty loud ouch.
 
Please don’t do this to us again.
 
P.S.  Obviously, failure to execute hurt MSFT directly, too.  Not only has MSFT stock been flat for seven years, but they let Linux in the front door and Mac in the back door (again).
Now it’s the rarest of the rare (at least over the last few years):  Good headlines for GOOG, YHOO, and MSFT:
 
There is interesting news for online advertising players:
 
*  GOOG seems poised to buy a big piece of telco spectrum — yet another industry sorely in need of disruption.
 
*  YHOO is going to own about 40% of the next hot Chinese IPO, Alibabarecreating the same shareholder-appreciating glow EMC is enjoying with VMWare.
 
*  And now, Microsoft has just landed a most coveted investment in Facebook.
I kicked myself for not writing this last Friday when the Dow and Nasdaq plunged, only to retrace earlier this week.
 
So, with the Dow and Nasdaq plunging today, let me say this:  Smaller blow offs, while painful, are a healthier way to moderate (dare I say) exuberance than a big ‘ole crash.
 
After all, you wouldn’t want a water heater without a pressure value, right?
 
But the $64 question is this:  Is this a small blow off or The Beginning Of The End?
 
My observation:  As long as the long list of companies leading this market up (GOOG, AAPL, etc.) continue to surpass expectations, the trend will be up.  The moment they don’t, the trend will be down.
 
Duh, eh?
 
Harkens back to 2000.  As I recall, I remember crediting MSFT, one of the companies leading the market back then, with being the catalyst for the entire dotcom bomb.  (I just didn’t have a blog to state it then!) 
 
Things were clearly frothy at that time.  I remember the Nasdaq being up 17% in one week — or was that one day?  Either way, that’s not supposed to happen with an index.  Everything was just grand until — until — MSFT, the leader, missed earnings by 1 cent… for first time in many years.
 
This sent a strong signal:  Unbridled growth (and enthusiasm) were no longer in front of us… but behind us.
 
What happened? 
 
MSFT closed 20 April 2000 @ $78.94 on volume of 52 million… and closed on 24 April 2000 @ $66.62 on volume of 314 million.  As we all know, MSFT — and the entire rest of the market — kept dropping.  When MSFT leveled out, it never really recovered, staying flat for the next seven years… and counting.
 
When will this happen with the current crop of leaders?
 
For GOOG, the go-go years should continue until online advertising hits at least 15% of the current spend… which, at only 5% +/- penetration today, still should give GOOG a year or two run-way. 
 
That’s why I’m the most optimistic guy in the world about online advertising:  15% penetration is not an "if" but "when".
Exactly seven days ago, Cal could have been ranked #1 in the country for the first time in something like 56 years.
 
What an amazing, amazing honor it would have been.
 
What utter heartbreak for Cal when their game-tying drive completely, utterly, and abruptly came to a stop with 10 seconds left on the clock.
 
I wonder, in their misery, if Cal would trade "The Play" (vs. Stanford, 1982 Big Game) for a clock stoppage at the end of last week’s game?
 
Hmmm… the first #1 ranking in 56 years… or — as difficult as this is for me to admit — the greatest ending to a football game EVER… ?
 
For any Cal fans actually contemplating that one, well, that really would make you a Cal weenie.
 
P.S.  Believe me, I wish Cal had won and gotten a #1 ranking… Cal would have been favored by probably another 10 points for Big Game… and Stanford could use those points!
Black Monday.  Oct 19th, 1987.  The stock market crashed 22%.  Heady stuff, even at the ripe old age of 28.  Truthfully, doesn’t seem that long ago.  But it shook us all to the core.  I remember three things:
 
(1)  I was at a dinner that night when Ben Rosen, Top Dog VC at the time (Compaq investor), made the following toast:  "Here’s to the start of the greatest bull run in history!"  How right he was.  How courageous he was to say it.  It certainly made a much younger & less experienced Royal feel better.
 
(2)  While everyone says the indexes recovered rather quickly, it emotionally took the world many more years to feel comfortable with equity investing again.
 
(3)  In one of the only times I’ve ever shorted a stock, I shorted Microsoft a few days prior.  Not because I didn’t think Microsoft was a great company — it was bloody apparent even back then that they were a phenomenon — but because I simply thought it got a bit ahead of itself and was due for a normal, short-term correction.
 
So, for me, the Stock Market Crash of 1987 held mixed emotions.  I was certainly happy about the short… but the uncertainty-about-everything-else-deep-in-my-gut made it impossible to celebrate.  As in all volatile transitions, one gets back to one’s roots:  Head down.  Work hard.  Build something great.
Go figure, a week where we see good earnings headlines for both GOOG and YHOO.  Been a while since we’ve seen that, eh?
 
Representative headlines:
 
 
ValueClick is having a rough morning.
 
They warned that Q3 revenues will be at the low end of their prior guidance… but reaffirmed EPS within prior guidance. 
 
Cause was continued weakness in their lead generation business (the troublemaker over the last few months), partially offset by — what most media outlets failed to pick up — better than expected results in their Comparison Shopping segment
 
They also issued a slight downtick to 2007 estimates but cited that they believe their lead generation business has now stabilized.
 
So, while negative news is never good, the negative news isn’t horrible… and there are some positives. 
 
All in all, is it worth a 10% slam to the stock price this morning?  Or, is this just another example of overreaction?
 
I think the latter.  VCLK is still trading up around 10% since my mention… and up around 30% when I originally started the post.  I continue to believe there is value in the online advertising segment for lots of players, including ValueClick.
With all the buzz about GOOG topping $600 last week, the new game in town is to debate whether GOOG is worth $200 billion or not.
 
Here’s my response to the Silicon Valley Insider (Henry Blodget) question:
 
Would you keep GOOG or take
 
  • Time Warner, News Corp, and Disney
  • 2/3 of your Microsoft stake
  • All the public ad agencies, plus $150 billion in cash
  • $200 billion in cash
  •  
    Disclaimer:  As you read my response, remember I’m the most optimistic guy in the world about online advertising!
     
    ~~~~~~~~~~~~~~~~~~~~~~~
     
    Henry–
     
    Keep Google. Here’s why:
     
    (1) Opportunity Size
     
    People can’t seem to comprehend the size of the ad opportunity since it’s so off-the-charts. Overall ad market estimated at $400-$600 billion (compare that to just $300 billion for entire enterprise software market… why do you think MSFT wants a piece of the ad action so badly?). Online ad revs will be $20 billion in 2007 (source: IAB http://www.iab.net/news/pr_2007_10_04.asp). That’s only 3-5% penetration. That means we’re still in the very early innings. Kinda like Microsoft selling to IBM when it was only a couple billion, what a mistake that would have been. Another data point: $1.6 billion seemed like a ton of $’s to Overture management… but they can’t be very happy with that sell-out now.
     
    (2) Operating Model
     
    Compared to Google, I wouldn’t want to run those other businesses… not just because they aren’t growing like Google… but the cost and effort to operate those businesses — compared to GOOG — are enormous. GOOG’s operating model is *singularly unique*… it’s simple, sticky, and will scale as traditionally offline segments — like TV — become online segments. (Imagine what happens when some of the big TV networks start outsourcing their advertising to GOOG… seems unbelievable… but that’s exactly what is happening on the web, who would have thunk that?) Understanding the extraordinary benefit of GOOG’s operating model is crucial to understanding why P/E may be the best way (the only way?) to evaluate GOOG during its run-up.
     
    (3) Summary
     
    I don’t believe that Google will own the entire ad world… that can’t happen because advertisers really do want alternatives. But, Google could eventually own 20-25%… or a $80-$150 billion piece… which, taking a 5 price-to-sales ratio (about what many of the mature techs have today), that puts a $400-750 billion figure on the company.
     
    Given how fast Google is "sucking the life out of old media" (http://www.internetoutsider.com/2007/08/the-great-adver.html), this could happen in a 5-10 year period.
    Other than owning Google, the only other chance to get that kind of return — with this large of a stake — is with the cash option and doing massive private equity plays like, well, buying GOOG.
     
    –Royal.
     
    P.S. Important to add that this doesn’t include any *new* businesses GOOG may decide to get into… after all, these folks think in 15-year horizons… and we know their appetite is limited only by their imaginations. Suppose they get into electric batteries and electric cars… make it sexy to be green… disrupt the entire oil complex? (Buying Tesla Motors could be a start.) Security stuff? Obviously we’re living in an ever increasingly dangerous world… and that’s all high tech. Financial services? Sports? Education? Entertainment? It could be a long time before "GOOG the global holding company" runs into saturation points… and out of challenges.
     
    ~~~~~~~~~~~~~~~~~~~~~~~

    GOOG Crosses $600

    Posted: October 9, 2007 in Technology and Business
    Yesterday GOOG crossed over $600… $609.62 to be precise.
     
    Consistent with what I’ve mentioned in the past, every news agency in the world covered the century crossing — not just any coverage, but front page news kinda coverage… the kind of press/advertising that money just can’t buy.
     
    For the record, I think this kind of money-can’t-buy-press-about-stock-price continues until they hit $1,000, at which time the unit changes to a millennium and the next big press pop of this kind happens at $2,000.
     
    Which is to say to Google:  If you haven’t split the stock before $1,000, please it do after.  Optics and diminishing benefits will work against you.
     
    P.S.  If you’re modeling after Berkshire Hathaway, don’t.  Two different situations, especially since your market cap is about the same as BRK-A.  That is, unless you want to do a 1-for-200 split.  Ouch.
    As I told the priest at the wedding last night — after mentioning 41-point underdog Stanford’s stunning last second, come-from-behind 24-23 victory over #2 ranked USC –"see, Father, there really are miracles… !"

    Value in ValueClick

    Posted: October 1, 2007 in Technology and Business
    Somebody recently asked me why I always talk about Google and Yahoo.
     
    Mostly because I think of them as a proxy for the overall online advertising business.
     
    But, was hard not to notice ValueClick going from 36 to 18 over the last few months.
     
    Why the plunge?
     
    They missed earnings by a penny (17 cents vs. 18 cents).  Revenue was light.  They’re clearing up some legal issues with a smaller part of their business (lead generation).  And, of course, they haven’t gotten asked to dance by any of the popular kids… which makes them look unpopular… for now.
     
    But like so many things on Wall Street, the plunge feels like a big overreaction.
     
    Couple that with their solid operating metrics, cash position, zero debt, quarterly earnings growth, etc. — and compare valuations with the other, uhm, popular kids — and it’s hard not to think there’s value in ValueClick (VCLK).
     
    Certainly, the last couple weeks of performance would concur.
     
    Mostly, though, we’re in one of the biggest industry transitions in the history of commerce (offline-to-online advertising)… there’s no reason why VCLK won’t benefit from that.
     
    P.S.  I started this post a few weeks back when VCLK was in the teens.  Wish I would have just hit the "Publish" button, I would have looked smarter. <grin><groan>