Saturday, March 31, 2012

Glu Mobile Can Make It On Its Own

A couple of weeks ago, I took a position in handheld gaming developer Glu Mobile (GLUU) at $4/share. Two items of note caused it to heat up in a hurry, and it closed at $4.85 today. The first item that contributed to the liftoff is a recent initiation of coverage by Needham & Company with an $8 price target. The second catalyst is the speculation that Glu Mobile may be an acquisition candidate by a larger organization. Both Bloomberg and Seeking Alpha contributor Chris Katje posted articles the last few days on this subject that got the stock off the launchpad.

My take is that this small cap company can make it on its own, and, in the long run, I'll be better off if it doesn't get absorbed by one of the more established players in the gaming sector like Electronic Arts (EA), or, Activision Blizzard (ATVI). I believe I may have hit pay dirt by purchasing the stock at a reduced level, and, it has the potential to make me significant money. Hear me out and see if you agree.

If you aren't familiar with Glu Mobile, they are one of the few pure-plays in the nascent mobile video game industry. They specialize in psychotronic titles such as Contract Killer Zombies, Blood & Gore, Frontline Commander and Big Time Gangsta. All of these games are made specifically for smartphones and tablets. Although they've been an established organization for ten years developing games for the PC and platforms like the XBOX (MSFT), they've recently changed their business model to concentrate primarily on mobile devices. In fact, 75% of revenues were derived from the handheld universe in their latest quarter.

One thing I like about Glu Mobile is that they are an international organization with development studios on four continents, according to the latest 10-K. These studios, based in San Francisco, California; Kirkland, Washington; Toronto, Canada; Sao Paulo, Brazil; Moscow, Russia; and Beijing, China, have the ability to design games to suit the needs of each region. In addition, with acquisition of rival Griptonite last year, they will now be positioned in India in the second quarter of 2012 without paying material additional consideration.

With a total of 1.75 billion smartphones projected to be activated worldwide by 2016, Glu's international exposure gives them home-court advantage in the major population centers. Another thing I really like about the company is that not only do their applications run on all of the major handheld operating systems like Android (GOOG), iOS (AAPL), Microsoft's Windows Phone and Research in Motion's (RIMM) Blackberry, but they have the potential to be utilized on large screen HDTV's in the home in the next few years.

CEO Niccolo de Masi discusses this in the Q4 conference call: " The good news for Glu is that we already invest in big canvas sizes and high resolution art for all of our Q4 2011 titles onwards. So games like Blood & Glory and Frontline Commando, it would also not only hypothetically work well if Apple introduced something for a living room, but it would work well if taken in places like the Mac store which has even bigger screens than tablets. So, we are thinking of course about long-term futures...".

Glu's new business model is a freemium one. If you aren't familiar with this concept, you probably aren't alone because it's fairly new. The 10-K says: Freemium games are, "downloadable without an initial charge, but which enable a variety of additional content features to be accessed for a fee or otherwise monetized through various advertising and offer techniques.".

"A recent survey by Park Associates found that while only 5 to 10 percent of the player base of social and free-to-play games regularly pays out of pocket, those who do pay are generous. The average Facebook gamer who spends money on games spends about $29 per month, according to the report. And those who pay for virtual goods and upgrades in free-to-play games average about $21 per month. And that adds up quickly when your player base is in the millions.", reports Chris Morris in USA Today.

In December 2011, Glu had approximately 2.9 million daily active users and 31.4 million monthly active users of their games on Apple's App Store, the Google Play Store and other platforms such as Facebook, Amazon's Appstore and Google Chrome. As of December 31, 2011, they had 176.1 million cumulative installs of their games on these platforms, including 44.7 million installs during the fourth quarter of 2011. Although it's a small universe, it will only get bigger.

Before we crunch the numbers, let's quickly take a look at recent research by Superdata:

  • Mobile gaming will represent a $7.5 billion worldwide market by 2015E, tripling from $2.7 billion today.
  • Asia currently the largest market for mobile gaming, with revenues forecasted to total $3.2 billion by 2015E.
  • Freemium accounts for 55% of all mobile game revenues, compared to 6% ad revenue.
Financial facts that stood out to me from the last conference call are that they finished 2011 debt free with a net cash balance of $32 million, and, they expect to break even on an adjusted EBITIDA basis once their new product cycle from their acquisitions is fully active in Q4 2012. Glu Mobile is also the number one seller of gaming apps on the Android platform. Android was the top smartphone operating system in 2011 with 48% market share, compared to Apple's iOS with 19%.

When we examine the econometrics supplied by Yahoo Finance, we see that Glu is slated to lose money this fiscal year which ends in December. However, for 2013, they are projected to earn $.18/share according to average analysts consensus. This would give us a forward P/E Ratio of 27. Sales look even better. Glu is slated to take in $87 million this year, and, $123 million in 2013. A growth of 43%. If they create a blockbuster title like Rovio's Angry Birds, then these figures will be much higher. When you take into consideration they are expected to grow earnings at 30% on a compound annual growth basis for the next 5 years, the stock doesn't look too pricey, especially if estimates prove to be conservative.

Although Glu shares could fetch a premium if they are absorbed by a larger rival, I believe it would be short sighted by the board of directors to approve such a move. I am very impressed by CEO Niccolo de Masi and think he has done a great job with the turn around strategy. My money is on him and his team. I didn't invest in Glu for a quick 50% gain (which I will proably get if they are bought out), I invested in the comapny because I think they can generate a healthy profit for not only my portfolio, but for the company in the next five years.

Wednesday, March 28, 2012

Velti: 'Mad Men' In The New Millennium

If you own a smartphone, you probably suffer from some sort of obsessive-compulsive disorder by constantly checking your e-mail, looking up stock prices, playing games, or, surfing the Web. One industry that will benefit from this phenomenon is mobile advertising. According to ABI Research, mobile marketing and advertising spending is expected to increase from $1.64 billion in 2007 to $29 billion in 2014. A company that may benefit from this rapid expansion is Velti (VELT).

I tend to gravitate towards undervalued securities, and, my initial exposure to Velti was from an article in Kiplinger's a few months ago. At the time of publication, the stock was trading near a 52 week low of $6.05/share. It shot up to $9/share in a matter of days once the magazine hit the newsstands. I thought I could catch it on a pullback, but it had a blowout fourth quarter soon after, and the stock rose another 25%. I bought in at $12.50.

Velti had its IPO in January, 2011 at $12/share, and, its 52 week high is $20. As far as price/action is concerned, I believe I got it at a reasonable level. Time will tell if I chased it. So why would I go out and buy a security that's doubled in three short months? First, it has a depressed valuation. Secondly, it's an international organization and hailed as the worldwide technology leader in the embryonic wireless broadband advertising industry.

According to the most recent Velti annual report: "We are a leading global provider of mobile marketing and advertising technology that enable brands, advertising agencies, mobile operators and media companies to implement highly targeted, interactive and measurable campaigns by communicating with and engaging consumers via their mobile devices.". They do this via a technology platform dubbed Velti mGage that feeds advertisements to mobile subscribers.

Their client list is impressive and includes: Orange, Vodafone (VOD), AT&T (T), China Mobile (CHL), China Unicom, Microsoft (MSFT), Intel (INTC), Ford (F), Dell (DELL) and Subway. Velti's platforms provide marketers the ability to reach more than 4.3 billion consumers in 67 countries and their customers have already connected with 1.4 billion consumers. During 2011, their 1,232 customers executed 4,114 campaigns on the mGage platform.

As CEO Alex Moukas said at the last conference call: " We are at the inflection point with consumers moving to the post-PC world and Velti is very well positioned to benefit from this, offering complete solutions for companies seeking to access the mobile marketing and advertising space.".

I agree. His point is illustrated by some projections from market research firm Maravedis: "Combining 3G and 4G devices, by the end of 2012, there will be a total of 72 million tablets activated worldwide, from 46 million in 2011. In addition, there will be 885 million smartphones activated worldwide, from 650 million in 2011...Finally, by year 2016, our forecast shows that a total of 1.75 billion smartphones will have been activated worldwide.".

In the past, one of the big knocks on Velti is the fact they did most of their business in Europe and the United States (they're based in Dublin, Ireland). However, that's changed in the last few years through partnerships and acquisitions. As an example, last year they established a long-term partnership with Bharti Airtel, the world's 3rd largest telecom operator by subscribers.

Wikipedia demonstrates their ability to expand globally: "In 2008, Velti gained the ability to execute mobile campaigns in the fast-growing Chinese market through the opening of a new office in Beijing and an investment in CASEE, the largest mobile advertising exchange in China (it should be noted that Velti recently purchased the entire company). In India, Velti partnered with HT Media Limited, India’s second-largest media group, on a mobile marketing joint venture called HT Mobile Solutions.". Thirty percent of the world's mobile users live in India and China.

With a potentially lucrative market in front of Velti, you can infer they're not the only game in town. In 2010, Google (GOOG) bought Admob, and, Apple (AAPL) scooped up Quattro. There are also smaller players in the mix. Millennial Media (MM) is an upstart with an IPO scheduled soon. Then there is Augme Technologies (AUGT.OB), the thorn in Velti's side. Augme currently has a patent infringement suit against Velti in the works. This is a common occurrance with technology companies, but something you should be aware of.

For a young growth company, I think Velti's valuation is still a bargain, despite the run up of late. For fiscal 2012, the average analyst estimate is $.74/share which gives it a P/E Ratio of 17. Take into consideration they are projected to grow earnings 48% for that same year, you've got a deal. Going forward to 2013, the earnings estimates are for $1.01/share. Its projected compound annual growth rate for the next five years is 37%. On the sales side, They are projected to take in $290 million this year, an increase of 53% over 2011. For 2013, expectations revenues are $390 million, a 35% increase year over year.

Projected estimates could prove to be conservative this year with catalysts like the November elections in the United States, and the Summer Olympics in London. I know I like this stock. However, these "can't miss" securities can sometimes go rogue, and, you may get shafted in the near term, especially since the market has moved so far in so short a time. I'm willing to take the chance that it will push higher from here. If the market corrects, and Velti along with it, I would add to my position.

Monday, March 26, 2012

Sequans Communications Needs Resuscitating

Sequans Communications (SQNS) has left investors holding the bag almost since its IPO in April, 2011. The stock debuted at $8/share, then turned into a money gusher for a scant 30 days when it topped out at $19 in late May. It's been all downhill since then, and the stock has been trading in the two dollar range for well over four months. After doing quite a bit of research on pure-play wireless equities, I took a position in it, based not so much what it is doing today, but what it may be doing in the next few years.

According to their corporate profile: "Sequans Communications is a 4G chipmaker, supplying LTE and WiMAX chips to original equipment manufacturers and original design manufacturers worldwide. Founded in 2003 to address the WiMAX opportunity where it is now a global leader, Sequans expanded in 2009 to address the LTE market. Sequans’ chips are inside leading 4G networks around the world. Sequans is based in Paris, with additional offices in USA, United Kingdom, Israel, Hong Kong, Singapore, China and Taiwan.".

Good enough, but why did investors get caught off guard, and, the stock become the whipping boy in the semiconductor sector? Edward Schneider gives an explanation in a report from the Mobile World Congress: "Sequans stock was massacred by a major drop-off in WiMax chip revenues. Sprint (S), Sequans largest customer, suddenly switched to an iPhone (AAPL) platforms last year, and suspended its WiMax chip orders.".

The article also goes on to say: "Some investors worry about larger competitors like Texas Instruments (TXN), Samsung (SSNLF.PK), and Marvell (MRVL) among others that will be entering the LTE chip arena. All things being equal, these larger competitors have lower costs than Sequans. But all things are not equal. Sequans LTE chip is on average 2x to 3x smaller and five generations more advanced than those of its peers.". Superior technology doesn't guarantee success, but it does give them a fighting chance in a sector that is poised for accelerated expansion.

The Sequans IPO Prospectus discusses the growth in their addressable market for the next few years: "According to ABI Research, the number of 4G chipsets shipped annually will increase from 14.5 million in 2010 to 245.9 million in 2014, representing a CAGR of approximately 103%.". The potential for reaching new customers is tremendous. GTI estimates that TD-LTE will cover two billion people in 2014. It's up to the subscribers in 3G smartphones and feature phones to upgrade, but the option will be in place.

Going back to the prospectus: "Our LTE solutions are currently in trials with wireless carriers in the United States and China, where China Mobile (CHL) has successfully demonstrated its LTE capabilities using our solution at the World Expo in Shanghai and at the Asian Games in Guangzhou, which were both held in 2010. Our solutions are incorporated into devices sold by many leading OEMs and ODMs, including HTC, Huawei, MitraStar Technology (a spin-off of Zyxel), Gemtek, Sagemcom, Teltonika, Accton Wireless Broadband and ZTE.".

Sequans' past relationship with China Mobile is intriguing because of the Hong Kong based red chip's 600 million customer base. This is the largest wireless subscriber base globally. Sequans was asked by China Mobile to develop semiconductors for its TD-LTE network at the previously mentioned Shanghai Expo. This doesn't necessarily mean the two organizations will be in partnership when the advanced wireless broadband service is deployed in The People's Republic, but it gives Sequans a foot in the door.

In fact, at the Mobile World Congress, China Mobile said it would begin large-scale trials of the 4G technology. The company is set to deploy 200,000 TD-LTE base stations by the end of next year. However, there was an unofficial report earlier this month that the Chinese government may delay granting the required TD- LTE licences for 2 to 3 years. I'm not sure if this report is true or not, but it did rock the mobile world, at least in the Far East. Investors got wind of it and put additional pressure on Sequans' stock price.

There's always the tango between value and growth, and I'm not sure where Sequans fits. Although it's been left for dead, it could be part of a highlight reel if it can stay solvent, and, 4G networks are introduced at a rapid pace. They have the leading edge technology, but lets look at the numbers before you go out and buy some shares. After all, at this juncture, they are not a profitable company.

Six analysts cover the stock on Yahoo Finance. For the current year, the company is expected to lose $.68/share with revenues of 37.38 million dollars. For 2013, they are expected to have a deficit of $.21/share and sales of 81.81 million dollars. Not exactly breaking the bank, but they are projected to make progress going forward. Current price/sales is one, and, price/book is at one single digit, too. Very reasonable valuations.

Only 19% of the outstanding shares are held by institutions, so if Sequans catches fire, it will be a full-tilt ride to the upside as mutual funds and pension plans pile in. I know they have an uphill battle, but all companies do. One of my reasons for owning it is that if their technology is all it's cracked up to be; they may be acquired by a larger company. At it's current valuation, I feel my downside is limited unless they file chapter 11.

Saturday, March 24, 2012

Ceva: Trading Near 52 Week Low

If you're trolling for potential breadwinners, the wireless industry is a good place to explore. On a global basis, smartphones and tablets are in their infancy, and you could hit the jackpot by investing in the right companies. Research and consulting firm Maravedis predicts by year 2016, a total of 1.75 billion smartphones will have been activated worldwide.

Seeking Alpha contributor Edward Schneider recently reported from the Mobile World Congress a terrific piece that covers some of the up and comers in wireless broadband. If you are looking for investing ideas in this nascent sector, go no further. Hitting the mother load with a big gainer is the objective of most investors, and this is where the action may be for a few years depending on your risk/reward ratio. One small cap wireless pure-play company covered in Mr. Schneider's report is Ceva (CEVA).

According to a recent posting on, Ceva is an: "Israeli semiconductor specialist, which has a U.S. headquarters in Mountain View, Calif., licenses specialized processor cores that convert analog information such as voice, video and images into a format that can be used by digital devices. A growing number of these cores feature on baseband chips within 4G handsets. Korean giant Samsung, for example, uses Ceva processor cores for handset chips running on Verizon's (VZ) LTE network. Ceva also licenses its 4G technology to Broadcom(BRCM) and Intel (INTC). In total, the company has announced 15 4G design wins so far.".

Ceva is no flash in the pan. As reported in their most recent 10-K: "To date, over three billion CEVA-powered chipsets have been deployed by the world’s top cellular handset and consumer electronics brands, including ASUS, Dell (DELL), Fujitsu (FJTSY.PK), Haier (HRELY.PK), Huawei, Lenovo (LNVGY.PK), LG Electronics, Motorola (GOOG), Nintendo (NTDOY.PK), Nokia (NOK), Panasonic (PC), Philips (PHG.BA), Pioneer, Samsung (SSNLF.PK), Sharp (SHCAY.PK), Sony (SNE), Sony Ericsson, Toshiba (TOSBF.PK) and ZTE (ZTCOY.PK).".

You'll notice this impressive list of handset manufacturers includes just about all the major players except for Apple (AAPL). This is primarily because Ceva does most of their business outside of North America. In fact, EME (Europe and Middle East) and APAC (Asia Pacific) accounted for 76% of total revenues for 2011. It would be nice to have a company like Apple in the fold, but, on a global basis, it's the Android operating system that commands the largest market share.

However, Apple is not entirely out of the picture. If we go back to the Q3 2011 conference call, Ceva CEO Gideon Wertheizer states: "iPhone 5 is up for grabs. Nobody has the real insight there, but the iPhone 5 if it includes LTE (long tern evolution) or a more advanced solution, I think everybody, and all the baseband players today, have a decent shot with their technologies.". This includes Ceva because they are a world class leader in this segment of the semiconductor industry.

This leadership position is illustrated in the more recent Q4 2011 conference call: "Shipment of CEVA-powered baseband units grew 105% year-over-year to 927 million units. Our DSP are now deployed in every meaningful segment of the market, starting with the high volume, low cost GSM feature phone market, going through the 3G advanced smartphone market including the growing China mobile TD-SCDMA market and up to the cutting edge healthy smartphone market. The use of our DSP is also expanding in the mobile broadband segment, including 3G and 4G USB dongles, tablets, and in the machine-to-machine segment in particular smart grid, automotive and surveillance applications.".

I wouldn't call Ceva a value proposition, but it is trading at a significant discount to its 52 week high of $35.60/share. It closed on Friday at $22.44, near its 52 week low of $21.69. If we frame it out, courtesy of Yahoo Finance, we can see that current year average analyst earnings estimates are for $1.03/share which gives it a P/E ratio of 22 for fiscal year 2012. Earnings are projected to grow at 21.4% next year and 18.7% for the next five years, so it's not terribly expensive. In fact, Ceva's average annual P/E ratio for 2011 was 36.5.

Besides residing in an explosive growth sector, and, trading at a reasonable valuation, I really like the fact that Ceva has a recent history of blowing out earnings estimates. In the last four quarters, they have beaten the analyst estimates by 15%, 29.4%, 23.8% and 18%. I can't understand why investors have turned a blind eye towards this company, but that's just the fickle nature of Wall Street.

In the beauty contest we call the stock market, Ceva could be big box office in the near future, with or without Apple. If Apple selects Ceva for the iPhone 5, there may be a feeding frenzy in the equity, especially where investor psychology is concerned. Even if Apple isn't a suitor, I think this company has a lot of appreciation potential, and as a result, I've taken a position in it.

Tuesday, March 13, 2012

Allot Communications and Deep Packet Inspection

The proliferation of data on broadband networks from the emergence of social media, P2P and VoIP puts a tremendous strain on telecom infrastructure. Throw into the mix cloud applications being served up by companies like (CRM) and AthenaHealth (ATHN), you come to understand we are in an era of massive mobile and broadband transformation. Add the embryonic Chinese market into the picture, and the pie gets even larger. In fact, China has 988 million mobile users, many who will be upgrading to smartphones and tablets as their standard of living grows.

An average smartphone user generates multiple times the data traffic as the owner of a plain vanilla cell phone. Because of this, there will be an enormous opportunity for telecom software and gear providers like Allot Communications (ALLT) which specialize in Deep Packet Inspection (DPI). To paraphrase their annual report, "Deep Packet Inspection is basically an intelligent bandwidth management solution that transforms broadband pipes into smart networks. Traditional network infrastructure devices, such as routers and switches, do not have sufficient computing resources or the required algorithms to distinguish between different rapidly evolving applications. DPI works in tandem with already installed equipment.".

A recent Investor's Business Daily article sheds more light on the subject: "Allot relies on its proprietary DART system — Dynamic Actionable Recognition Technology...DART is a traffic-inspection system. It sorts the innocent from the malevolent and routes the traffic to the right destination in the most-efficient way. DART also tracks data usage by subscriber. DART helps address the issue of data hogs, those few that soak up a disproportionate share of available bandwidth. This helps ISPs provide the service that everyone needs, perhaps by charging the hogs (mostly peer-to-peer users) for their unusually high usage.".

To highlight just how much wireless broadband is growing, we can look no further than the semi-annual Allot Communications' MobileTrends Report H2, 2011. This shows there was explosive growth in the wireless sector from July through December of last year, and foreshadows more growth to come:

  • Mobile broadband traffic grew by 83% in the second half of the year with a CAGR of 234% during 2011.
  • VoIP & IM traffic grew by 114%, perhaps substantiating recent reports on SMS and international voice calls decline.
  • Video Streaming traffic continues to dominate mobile broadband, with a share of 42% of total bandwidth.
  • Android Market traffic grew by a phenomenal 232%, almost four times faster than the Apple App Store, increasing its momentum to become a true Apple App Store rival.
  • YouTube now accounts for 24% of the total broadband traffic; 14% of total YouTube traffic is high-definition.
  • WhatsApp now accounts for 18% of the IM total bandwidth, a dramatic increase in popularity from only 3% in H1, 2011.
  • Facebook messenger is an all-time ‘killer app’ on mobile; rising from zero to 22% of total IM traffic in just four months.

Because of the market potential in DPI, there is a firestorm brewing with Allot's competitors. Their principal rivals are Cisco (CSCO) (through the acquisitions of P-Cube and Starent Networks) and Sandvine (SNVNF.PK) in the service provider market, and Blue Coat Systems (CFO.F) (through its acquisition of Packeteer) in the enterprise market. They also compete with a number of smaller competitors such as CloudShield Technologies and Procera Networks (PKT).

You don't have to live in Silicon Valley to surmise that Cisco is the 800 pound gorilla in this space, but they are a large company. Investors in Cisco may get price appreciation (and a small dividend) by owning the equity, but my belief is that you may make more money in pure-plays like Allot. In fact, the stock has increased from $4/share in 2010 to its current valuation of $18/share. During that same time period, Cisco has lost share value by about 20%. Smaller companies are nipping at Cisco's heels and taking market share in various sub-sectors in telecom infrastructure. An example is Aruba Networks (ARUN) in Wireless Local Area Networks.

Allot is a globally positioned organization and as last reported, they derived 60% of their revenues from Europe, the Middle East and Africa; 22% from Asia and Oceana and 18% from the Americas.

There are many red flags for a small company like Allot. They have a beta of 2.29 and, if the market corrects, the stock will fall harder. In addition, they trade only about 350,000 share on an average day. Until last year, Allot hadn't been profitable in years, but that is typical with a young growth company. Just take a look at Nuance Communications (NUAN) and their decade in the red from 2001-2010. One client also accounts for 30% of sales.

The Investor's Business Daily article also cautions: "Be aware that $22 million in sales makes Allot a tiny company, as does its $454 million capitalization.". However, the company has also reported triple-digit earnings growth for five straight quarters and sales growth has also averaged 39% in that time range. Allot Communications only made $.26/share the past 12 months and with a price of $18, we get a P/E ratio of 69. Expensive, but if they continue to cook on all four burners, that ratio will come down as Allot increases their bottom line.

Investing in a moneymaking machine isn't that common if you are screening the S&P 500. For every Apple (AAPL), there are about 499 other stocks that may give you a hefty paycheck by doubling or tripling over a five year period (which is a great return), but not be considered a winning lottery ticket. To get the really incredible gains, you usually have to take your chance on young companies to put you in the winner's circle. Allot Communications could be one such company, but I wouldn't buy it at this level. The market has come too far, too fast and is need of backing and filling. You may feel differently.

Saturday, March 10, 2012

Synchronoss Technologies: Beast of Burden in the Smartphone Market

If you own a smartphone or tablet computer, you're probably using the slick software of Synchronoss Technologies (SNCR). As its name implies, it synchs up your e-mail account on your smarthone with your desktop computer among other things. Synchronoss does a lot of the heavy lifting that makes your life easier.

In a recent press release, the company explains: "With Synchronoss, operators can better manage bandwidth constraints by seamlessly switching subscribers between 3G, 4G and Wi-Fi networks for the best user experience without the complexities associated with finding a secure network and login procedures.".

An Investor's Business Daily article adds to the conversation: "Its software activates wireless accounts and lets mobile phone users automatically transfer data, such as contact lists and calendar notes, to new devices. Wireless companies load mobile phones with Synchronoss software.".

Their industry leading customers include service providers such as AT&T (T), Verizon Wireless (VZ) and Vodafone (VOD), OEM/e-Tailers like Apple (AAPL), Dell (DELL), Sony (SNE) and Nokia (NOK) and, cable operators like Cablevision (CVC), Comcast (CMCSA) and Time Warner Cable (TWC). According to the most recent 10-K: "These customers utilize our platforms, technology and services to service both consumer and business customers, including over 300 of the Fortune 500 companies.".

Because of their strong relationship with Apple, I would think that when the much ballyhooed Apple TV is released, Synchronoss may be a beneficiary. However, one caveat to the stock is a disproportional dependence on the iPhone and AT&T. Granted, they have been doing business with Ma Bell since the formation of Synchronoss in 2001, and, they have a fairly big moat around them, but if they lose their contact with AT&T, the stock would get crushed.

Chairman, President and CEO Stephen Waldis addresses the problem in the February 7th, Q4 conference call: "...the diversification of our business was an important focus during 2011, and we are very pleased with the progress made. Our non-AT&T related revenue grew to nearly 50% of our total revenue for the year. That's up from 40% of our total revenue during 2010, and we expect continued focus, efforts and success on customer diversification in 2012.".

One step Synchronoss has made to combat the overexposure to AT&T is the acquisition in early February of Miyowa. The purchase of Miyowa expands their existing mobility platform by adding powerful social networking device capabilities. This enables social and mobile to come together, delivering a significant unified and easy to use social experience for their Service Providers and OEM customers.

As the press release states: "Miyowa’s customers include Tier One carrier Orange, as well as device manufacturers such as HTC, Samsung and ZTE. Additionally, the company has partnerships with the world’s best known social networks and messaging providers, including Facebook, Twitter, Windows Live (MSFT), Yahoo! (YHOO), Gtalk (GOOG) and AIM (AOL), many through privately accessible API’s. The combined technology stacks will enable Synchronoss to enhance its cloud strategy across multiple devices and operating platforms.". This gives them a big exposure to the Android operating system.

Although the company expects the acquisition to be at least neutral to its non-GAAP earnings per share for 2012, they have a history of reporting mind-numbing numbers that exceed analyst projections. Early last month, Synchronoss beat views and gave 2012 guidance above expectations. In fact, for 2011, they upped analyst numbers every quarter, and bettered the average estimate in December by a whopping 47%. This was probably primarily due to the popularity of Apple's mobile products.

Since its IPO in 2006, the company has been profitable, and, carries very little debt. It currently trades at $31/share, roughly in the middle of its 52 week range of $22 on the low, and, $39 on the high side. Current fiscal year average earnings estimates are $1.10/share, and, for 2013, $1.31/share. These same analysts project earnings growth of 12.2% for 2012, 19% for 2013, and, a 5 year compound annual growth rate of 20%. These estimates may prove to be conservative if smartphone and tablet proliferation continues to grow at a rapid pace.

With a P/E ratio of 30, the stock might have gotten ahead of itself, which could account for its range bound performance the past 12 months. Synchronoss has moved sideways since the beginning of 2011 after an incredible 7X increase from the 2009 lows. Even a recent initiation of coverage as an outperform, and, an elevated price target of $41-$44/share by Wells Fargo (WFC) didn't budge the equity.

The markets have come a long way in the past four months and are probably due for a correction. With a short float of 19%, Synchronoss can probably be bought for a reduced rate. That said, I really like this company and would like to add some to my portfolio because of its growing importance in the expanding mobile computer marketplace.

Sunday, March 4, 2012


It's been over two months since my last posting, and the markets have roared. In fact, when examining a calendar year, it's one of the best starts in decades. Since early October of 2011, the NASDAQ is up almost 30%. That's more than a nice return in a short period of time if you are long the cubes (QQQ). Because of the acceleration in stocks, in early January I liquidated my leveraged/short ETFs, which are the ProShares UltraShort S&P 500 (SDS) and the Direxion Daily Small Cap Bear 3X Shares (TZA). I'll just take the tax write-offs and move on.

However, I still don't believe we're out of the woods yet in regards to a double dip in the overall indexes. For every prognosticator of a new bull market, you get your Jim Rogers, George Soros, or Rick Santelli warning of some serious reckoning in the next year or two. A reckoning that likely will be much worse than 2008/2009. With IPOs like Yelp (YELP) gaining 65% on the first day of trading, it seems a bit like the late 1990's. I'm airing on the side of caution still, and, will remain in cash, although I have limit orders in on two securities that need to drop significantly in price before I buy them.

A few things have caught my eye in the last month. One is a statistic that: "Mobile devices will account for about 80% of all broadband Internet connections in the G-20 nations by 2016, according to Boston Consulting Group.". I enjoy my iPhone and fully understand what all the fuss is about. This is why I am going to begin writing a series of articles on primarily small, pure-play companies in the tablet and smartphone sector.

For the past 18 months, I've been blogging almost exclusively about cloud computing companies, and most of these securities have extremely elevated valuations. Sure, they will continue to grow at a rapid pace, but I wouldn't want to put my money behind them. I learned my lesson in 2000 when I sold stocks like EMC (EMC), Oracle (ORCL) and Cisco (CSCO) before the crash, only to get burned by investing in technology stocks with "decent" PEG Ratios. Everything got taken down in the aftermath of the crash, and I left some money on the table.

What I want to do with this new series, is look at the young upstarts that may be big winners as the wireless Web engulfs the globe. Many of these equities are dangerous because of their brief trading history, but what stock isn't? Just look at the recent history of "sure things" like General Electric (GE) or General Motors (GM). It's always what your risk/reward is. The type of equities I am going to cover in depth are primarily small caps or micro caps. I'll try to stay away from the pink sheets, but some of the companies I'll be looking at haven't made it to the major exchanges.