Mullaneblog

Spectacular Results Any Way You Look At It

• 47% market share of search business, Google continues to grow share
• 67% growth in revenue
• Earned over $1 billion in net income for the quarter—A Big Number

Google’s strategy of letting users develop content continues to work. Yahoo and old-line media continue to believe only large institutions with deep pockets can generate content for the masses.

During the conference call, Google decided to spend time discussing its ad platform in which it paid over $3.0 billion to its partners during the past year. It was clearly an effort to distinguish between Google and Yahoo!’s Project Panama—which is just being introduced.

Any way you slice it, Google is becoming more and more powerful of a company. It’s ability to share revenue with partners based on algorithms built by the company is very powerful. Yahoo is going to have a tough time catching up.

February 1, 2007

Follow

New Product Launch Will Re-accelerate Growth

Microsoft (MSFT) reported revenue growth of 6% , but if you include the big jump in deferred revenue, revenue increased 20%, according to the company. Bookings growth was also up over 20%.

Microsoft will be launching the consumer version of Vista in February. As a reminder, Microsoft has also launched a new Office and Exchange Server. This broad product launch is huge for Microsoft.

Chris Liddell, Microsoft’s CFO, said he expects an excellent year. He also cited that hardware sales for the December quarter was strong, another positive data point for the sofware giant.

Going forward, Microsoft expects double digit revenue growth and for earnings per share to exceed revenue growth.

Microsoft’s stock has had a good run anticipating the launch of Vista. However, it appears results are already exceeding most expectations. It appears Microsoft has its growth back and the stock has more to run. Investors have to ride the Vista launch.

January 26, 2007

Follow

SAP’s Weak Results Point To Oracle’s Success

SAP AG (SAP), which warned earlier in the month, made comments in yesterday’s Q4 earnings conference call point to Larry Ellison’s prognostication of SAP’s demise being more and more correct.

Back in September, after reporting a blow-out quarter, Oracle’s (ORCL) Ellison said SAP is a number of years behind. Ellison went as far to say that if Oracle doesn’t screw up, SAP is in big trouble.Since Ellison made those comments, more and more evidence is coming out supporting his view.

Since late 2006, SAP has reported poor results and IBM has reported weak results in businesses that work closely with SAP.

SAP said it is going to spend an extra 300 to 400 million euros over the next eight quarters for new software development. This further supports Ellison’s claim of SAP beginning behind the curve.

Oracle’s stock had a good year in 2006 with industry spending in a lull. But now it appears the lull is over and Oracle could be off to the races again.

January 25, 2007

Follow

The Power Of 3 Is Powerful

The “Power of 3” is what Meg Whitman calls eBay’s (EBAY) 3 primary businesses — marketplaces, payments and communications. Any way you slice it, the Power of 3 is working.

• For 2006, $6 billion in revenue, up 31%
• Purchased $1.0 billion in stock and is upping it to $2.0 billion — eBay has never repurchased its stock prior to July 2006
• eBay has 220 million users and Skype is now up to 171 million users, both growing nicely
• Other eBay names that it owns or has interest in or relationships with are doing well like Shopping.com, Craigslist and VeriSign

Of the many positive points for eBay, the most important to drive this stock higher is that growth is now re-accelerating. Historically, large growth companies perform best when the growth rate picks up. The company is guiding to 18% to 21% growth for 1Q07, which appears too conservative.

Sometimes it is best not to think — just buy and put a stock away. That is what investors should do with eBay.

January 25, 2007

Follow

Sun’s Results solid, but KKR Convert Raises Questions

Sun (SUNW) reported a solid 7% increase in revenue for its second quarter, citing good demand for its SPARC chip multithreading (CMT) servers and x64-based servers as well as the increased acceptance of the Solaris 10 Operating System.

More importantly in the tech world, the company showed strong gross margins, coming in at 45%, up from 43% last year.

Sun generated cash from operations of $153 million and had cash and marketable securities at the end of the quarter of $4.8 billion, a lot of cash.

However, despite good cash generation, improved margins and a strong balance sheet, Sun decided to go forward with a $750 million convert with KKR. During the earnings conference call, analysts could not figure out why Sun did the deal.

Jonathan Schwartz, Sun’s CEO, said the KKR transaction will allow it to better explore strategic opportunities. He added there could be some cross selling opportunities between KKR’s portfolio companies and Sun. Analyst did not appear to believe him.

The reality is the only reason for Sun to need this extra cash is to make a sizable acquisition. Despite an improved operating performance, the growth metrics for Sun, especially within the US, are still weak.

Look for Sun to do another big transaction this year.

January 24, 2007

Follow

Worth Chipping Away At: Good Risk-Reward Bet

Buying Yahoo’s (YHOO) stock is a bet on Project Panama, its new advertising platform. If it succeeds, the stock goes up. If it fails, Terry Semel gets fired and the stock goes up. Therefore, investors are almost in a win-win situation.

In addition, the downside risk is protected by the powerful cash flow machine that this company is. For 2006, Yahoo generated revenue of $6.4 billion, EBITDA of $1.9 billion and free cash flow of $1.27 billion. Any way you look at it, Yahoo’s cash generating ability is not going away over night.

For the stock to take off, Project Panama needs to be able to better dynamically link search with advertisers, thereby driving growth again. However, investors will not see this growth until 2Q07. Yahoo stated that 1Q07 will be a transition period.

Waiting for Project Panama to show positive results could prove to be a big risk. If the new advertising platform takes hold the stock might have already discounted the success, making it too late to profit. With little downside risk, Yahoo is worth purchasing and putting away. If the new advertising platform begins to work, this stock will quickly come back into favor.

January 24, 2007

Follow

Weak Results at TI; Waiting For New Product Ramp

The handset market is maturing and Texas Instruments (TXN) results clearly showed this:

• 5% decline in semiconductor sales sequentially
• Wireless was the primary reason for the weakness, declining 10% sequentially. Handset growth is shifting to lower end products
• Orders down 10% — weak
• Book to bill is at .89 — weak
• Expect revenue to decline for 1Q07 of 5% to 13% — weak
• Growth at TI is coming from a low-cost integrated chip for low-end phones sold in emerging markets. While this business is growing, it does not offset the weakness of the higher end 3-G business.

For TI to grow again, it needs a higher end product to take hold. Specifically, a mass market RIMM, Treo, or Q-type device. This most likely will not happen until the 2007 holiday season.

No need to rush into TI’s stock. Wait for seasonally weak summer season to look at this stock again.

January 23, 2007

Follow

Lyondell’s Got it All: Earnings, Cash Flow and a Huge Refinery

Lyondell Chemical (LYO) was mentioned twice as a stock to buy in this past weekend’s Barron’s roundtable, recommended by both Archie MacAllaster and John Neff.

At $25, the stock is selling for 6.25x earnings versus the S&P 500 selling for 15x to 16x earnings. What is particularly attractive about Lyondell is that it bought out its Venezuelan partner’s 41% stake in the Citgo refinery and now fully owns this sizable refinery. This asset should generate a lot of cash flow for Lyondell’s shareholders for years to come.

Lyondell put a good chunk of debt on its balance sheet to purchase the Citgo refinery stake, but has already reduced debt by $2 to $3 billion, according to MacAllaster, who put a $40 price target on the stock.

January 23, 2007

Follow

Dollar Weakness Is Not Necessarily Bad

Bill Gross, of Pimco fame, joined the chorus of Warren Buffett and others saying the U.S. dollar is “doomed.” Gross made these comments in this weekend’s Barron’s Roundtable.

Gross repeats the same comments as many others: the twin deficits (federal and trade) will force the country to inflate its way out of the deficits. This is pure hogwash.

The U.S. dollar will go down relative to some currencies due to other countries becoming wealthier. This is a good, not a bad thing. Emerging economies will provide goods and services at competitive prices and the market will reward those countries with a stronger currency.

This is exactly what happened to Japan in the post-World War II era. Japan started off making low-end trinkets and then moved up the value chain, becoming a powerful global economic participant. Its currency appreciated relative to the dollar along the way.

The same will happen to other currencies. China was the prime example in 2006 as it began to manage the appreciation of the yuan.

When you hear all this negative babble that the U.S. currency is doomed, take it with a grain of salt. The dollar weakening because other economies are doing smart things is a good, not a bad thing. History has shown that as long as the U.S. keeps inflation between 2% to 2.5%, then a weaker dollar is manageable.

January 22, 2007

Follow

Start Looking At Select Commodity Stocks

TheFly blogged to avoid commodity stocks back in the spring. Our timing was quite good. However, a lot of these stocks have corrected significantly and they are beginning to represent good value.

Pioneer Natural Resource (PXD) was mentioned by Archie MacAllaster in this weekend’s Barron’s Roundtable. Pioneer is the third largest independent oil and gas producer in the U.S. and its stock has come down from a high of $54 to $38 — a big correction.

According to MacAllaster, Pioneer had forward sold a lot of its output considerably below today’s prices. Therefore, as these contracts come off, Pioneer can sell their gas at much high prices and earn greater profits, despite the recent natural gas price pullback. Pioneer’s reserves are all domestic, so they will benefit from better prices due to the inevitable decline in U.S. reserves.

Also, Pioneer has shrunk it shares outstanding from 145 million to 125 million and is supposedly on its way to 100 million shares outstanding.

January 22, 2007

Follow