Sunday, September 23, 2012

I Fought The Law (And The Law Won)

"Just because you have the monkey off your back, doesn't mean the circus has left town." - George Carlin

Experienced investors will tell you: "Don't fight the FED". I fought the FED for over two and a half years and paid the price. After the market crash of 2008-2009, I got short the market with leveraged ETFs because I truly thought we would revisit the lows during the dark days of four years ago. Things didn't work out as planned.

I took my best shot, and also took a bath with an expensive investing lesson: historically speaking, stocks go up two out of three days. To say I don't regret my decision of sticking with my short positions would be a false statement. What's done is done. I'm on to other endeavors. Most specifically, I'm trying to take advantage of the nascent wireless broadband revolution by investing in anything that is involved with smartphones and tablets: applications, facilitators and infrastructure plays.

In the six months since I began putting my money in long positions, I'm slightly underwater. No beef on my part. Although the market has seen gains since early March when I began to dollar-cost-average with concentrated portfolio selections, the stocks in my possession have rotated out of favor for the likes of risk-off, or dividend paying securities. This may soon change if technology stocks come back in vogue for the third and fourth quarters as they historically do. What I would like to do now is offer a summary of my buys and sells the past six months and see where I stand.

Facebook (FB): I think today's Barron's cover story, "Facebook Is Worth $15", says it all. A lot of smart people priced the Facebook IPO at $38, only to see its world turned upside down a few months later. It crossed the tape at $18 two weeks ago. The brain trusts on Wall Street can't be that wrong. I picked up the social media giant at $19.15, and will keep a close eye on it because I really don't use the service although a billion people are really lapping it up. Facebook has rallied nicely the last two weeks to $23. If they can figure out how to monetize their mobile application, it can double in two years.

Sequans (SQNS): I took a sizable stake in Sequans last March with an average cost of roughly $2.50. The producer of 4G LTE semiconductors lost a considerable revenue stream when a significant customer stopped manufacturing WiMAX phones. Since new initiatives in 4G LTE won't come to fruition for a few more quarters, I decided to sell my shares when the equities price dropped to $1.80.

I usually hold securities for a long time horizon, but with the price dropping so much on a percentage basis, and the fact Sequans is not making money at this juncture, I have decided to keep them on my watch list. If an opportunity presents itself after the first of the year, I would be inclined to purchase more shares. They have many solid relationships in Indonesia and China.

Glu Mobile (GLUU): Glu Mobile's business plan fits perfectly into my investing philosophy for the smartphone/tablet space: platform agnostic, internationally positioned content provider. I've maintained a long position in Glu from the get go, but have also been trading the equity when it gets to be too large of a position in the portfolio. I've used the profits to add to other stocks on the menu that have been under pressure.

I'm not a gamer, so it's difficult for me to get excited about Glu's stable of freemium mobile games. However, this is a well managed organization, and is in turnaround mode. There's a lot of buzz on the street about this company, so investor psychology may play a big role in propelling this stock higher around New Year's. I sold half my position when it rose 40% in three months, then added more shares when it sold off, so I'm basically back to my original allotment. My average cost is $4.80.

Acme Packet (APKT): Acme Packet is the global leader in Session Border Controllers (SBC), but its share price has been decimated from weak European and North American telecom operator demand. Originally, I purchased the bulk of my shares at $25, then bought more when the price dipped to $18. On a trailing twelve month basis, the stock is sill expensive at around $19. In fact, going forward into 2013, it's still not a bargain.

However, I like the management of Acme Packet, they've got a spic and span balance sheet, and great prospects going into 2014 and beyond. They are a major player in VoLTE (voice over long term evolution) which is the future of telecom. I plan on accumulating more shares during 2013 if the price is still depressed.

CEVA (CEVA): CEVA is the global leader in DSP (digital signal processing) semiconductors. They basically licence their technology to other chip manufacturers like Broadcom (BRCM). I was surprised they didn't participate in the halo effect after the launch of Apple's (AAPL) iPhone 5. According to their latest conference call, they expect a significant reduction in inventory going into 2013, which may goose the stock in the 4th quarter.

I bought in at $22, and added additional shares at $15 where is currently crosses the tape. It's selling at its 52 week low. Its high was $34.50. They have a significant part of their portfolio in 4G LTE technologies. I added to my position when I sold Sequans, and my average cost is $18.50.

Velti (VELT): Velti resides in a sector that is a place of potential combustion: mobile marketing and advertising. They've got a tremendous amount of competition with the likes of Google (GOOG), Apple, Millennial Media (MM), and a slew of smaller firms. Everybody is at each other's throats. It's survival-of-the-fittest. However, Velti is the only international pure-play in the sector which is why I'm banking on it.

I've overloaded the portfolio with shares of Velti because I believe it has the greatest potential for price appreciation in their sector. It's cheap on a valuation basis with a P/E of 13, and a growth rate of 30%. If it can reach a PEG Ratio of one, the stock could triple in the next year, if not sooner. I originally bought my shares at $12, then added a significant portion at $6.50. As of this writing, I'm treading water with this investment.

Synchronoss Technologies (SNCR): The secret weapon for this company is that they are invisible to the millions of smartphone owners who check their e-mail, sync on the fly, and upgrade to newer mobile devices among a slew of other things. You've got to be able to take a punch in the fickle world of Wall Street, and that's exactly what's happened to Synchronoss this year. The stock was trading near $40, only to be knocked down to $18 because of concerns that they rely too heavily on AT&T (T).

Well, they do a significant amount of business with Ma Bell, but that may be in their favor with the recent release of the iPhone 5. AT&T is Apple's largest carrier and customers are upgrading in droves if early reports are any indication. Synchronoss is also branching out by doing business with Vodafone (VOD) and Verizon (VZ). The stock now trades near $25, right about my average cost per share. I expect big things from this company in the next few years.


Like all investors, I am expecting my stock selections to increase in value during the next 3-5 years. That's my usual holding period. However, sometimes an equity gets so far ahead of itself that it's time to take some profits. Primarily, I prefer to keep a stock for over a year to take advantage of capital gains laws, but sometimes you just have to sell like I did with some of my Glu Mobile shares earlier this year.

I'm not so sure buy and hold investing is as dead as many pundits are predicting, especially as we enter a new phase of technology development, the buildup of Web 2.0, otherwise known as the wireless broadband revolution. If the market doesn't crash again, we may very well be in another era like the PC proliferation in the 1980s. My decision to invest in a concentrated portfolio isn't what financial planners recommend, but I believe it's my best way to take advantage of the explosive growth in smartphones and tablets we are experiencing.

Thursday, September 20, 2012

Demystifying Some Aspects Of Acme Packet's Business

Acme Packet (APKT) is the undefeated world champion in session border controllers (SBC) which act as traffic lights for the Internet's backbone. If you're not a computer scientist or an electrical engineer, investing in the technology sector can be a confusing endeavor; not only for retail investors but for experienced buy side analysts, as well. I've been writing about Acme Packet for a year and a half now with the help of research reports, conference call transcripts and on-line trade journals, but still, some questions about their technology remain unanswered.

Most specifically, two relationships they have with Broadsoft (BSFT) and privately held Aicent are a bit cloudy to me. I took the opportunity to contact the company, and they were very helpful in filling in the blanks. Julia Dunlea (in media relations) coordinated this effort, and Kevin Mitchell, Acme Packet's Solutions Marketing Director fielded all of my inquiries. Before I begin, just some background on the interview process. I submitted all of my questions via e-mail in the form of a questionnaire. They were promptly returned and I am reporting the Q&A session verbatim.

Ted Stamas: I'll start with Broadsoft first. All I know about the company is that it is a cloud company in VoIP. I realize that your two companies offer an integrated platform that allows key operator services over VoLTE. My question is, what are these operator services? Is it services like caller ID and call waiting, or something else?

Kevin Mitchell:Acme Packet and Broadsoft have a lengthy history of working together to deploy VoIP infrastructure so service providers can offer consumer and business hosted IP voice and unified communications. Building on that track record, we announced a joint solution based on Acme Packet’s core IMS platform and BroadSoft’s application server suite. The combined solution, company experience can vastly simplify the transition to all-IP networks, streamlining the overall architecture and result in capital and long term operational cost savings.

The services involved are all voice and interactive communications in the all-IP world of LTE and fixed broadband. Voice, caller IM, messaging, video chat, multimedia collaboration, fixed mobile convergence and more.

BroadSoft sells both software as well as a cloud offering to service providers.

Ted Stamas: How long have you been working with Broadsoft?

Kevin Mitchell: Our companies entered the VoIP world around the same in 2000 and have worked together closely since inception.

Ted Stamas: With this partnership with Broadsoft, who is your competition?

Kevin Mitchell: For the most part, it’s the big, expensive, slow legacy telecom manufacturers that bring over engineered solutions to market.

Ted Stamas: With this particular relationship with Broadsoft, where do you see the overall market going in two to three years?

Kevin Mitchell: All service provider networks are moving to a pure IP environment. IMS is one such flavor of the communications service environment in that all-IP world. Together, Acme Packet and Broadsoft can address all communication network needs.

Ted Stamas: Finally, do you have any idea what share of the market your recent joint venture has? I know you are the worldwide leader in SBC's, but what about in VoLTE?

Kevin Mitchell: Our SBC leadership extends across all aspects and applications of VoIP and IMS and Broadsoft is a global leader in voice application servers. Acme Packet is involved in over 150 IMS projects globally and roughly 30 VoLTE engagements. VoLTE is nascent, but deployment plans are increasing.

Ted Stamas: Now I'll concentrate on the recent Aicent announcement. Again, in layman terms, what does this relationship with Aicent do in regards to technology?

Kevin Mitchell: Aicent is a carrier’s carrier. They connect service providers around the globe to enable end-to-end communications. This includes voice and data roaming and international phone calls. How LTE voice and data sessions will work while roaming is critical to smoothly transitioning mobile communications to the 4G era and satisfying subscriber expectations.

A major issue for LTE roaming is that the underlying technology is IP, a fundamental difference from 3G and relies on specialized signaling called Diameter to enable connection to and use of the network. As communications transition to these IP networks, service providers face new challenges to build reliable roaming architectures that include interoperability, routing, and security. Our solutions solved those problems for Aicent.

Ted Stamas: I noticed in the press release that Aicent does business in China with China Mobile (CHL) and China Unicom (CHU). Is this a potentially new geographic market for Acme Packet?

Kevin Mitchell: Acme Packet has over 1700 customers in 109 countries. We have long standing customers in China Telecom and China Mobile and many others in the Asia Pacific region. While this is not a new geographic market for Acme Packet, the Aicent relationship broadens the types of customers we serve in that market.

Ted Stamas: Why would investors take notice of this partnership with Aicent? Without getting into specific numbers, is it a potentially lucrative market?

Kevin Mitchell: This is a concrete example of helping service providers accelerate the move to all-IP. This particular solution is a combination of our SBC and a similar product called the Diameter signaling controller that provides security, routing, and interworking for Diameter signaling. Together our solutions are providing essential control functions for the two major signaling protocols that underpin all services in the LTE and IMS.

Ted Stamas: Who is your competition in this sub-sector?

Kevin Mitchell: In the wholesale carrier/roaming hub market, we individually compete with other SBC and DSC vendors, but there is not a single vendor that can provide the combined solution.

Ted Stamas: I've read your last five conference calls, so I've got a good idea where your company is going in regards to wireless. However, how will the smartphone and tablet space benefit or be useful to your business?

Kevin Mitchell: Service providers face an influx of more: devices, connections, sessions and data. To effectively monetize this demand, session delivery networks are critical for service providers to build. We help service providers do that and successfully enable the all-IP evolution.


Acme Packet's share price has experienced a nice run the past six weeks since my last article. You can find fundamental evaluations there, if you are so inclined. At the time of that writing, the stock traded at $15 and now hovers in the $18 range. Granted, the market has experienced a concurrent run, but this is not the year of Acme Packet.

In fact, it's been a tough year for shareholders. However, to use a timeworn investing expression, "It's not where the stock's been, but where it's going". They've built a better mousetrap, and with solid management, a squeaky-clean balance sheet, and a bird's eye view of the next five to ten years, this stock is one I'm personally betting on. I'm a firm believer of the wireless infrastructure buildup, and Acme Packet doing a significant amount of the behind the scenes heavy lifting.

Again, I'd like to thank everybody at Acme Packet for making this interview possible.

Saturday, September 8, 2012

Tweets: One's Too Many, A Hundred's Not Enough

My new toy the past month has been a Twitter account. I find it an invaluable asset in my investing toolbox. You get front-page news the moment it's released on the companies in your portfolio, and on your watch lists. A lot of raw talent went into programming the top grade software that Twitter offers. I can see why some investing pundits think it may eventually dethrone Facebook (FB) as the top dog in social media.

Google (GOOG) just released a study on consumer interactions with multiple screens. Mobile Marketer writer Lauren Johnson analyzed the study, and reported 66 percent of social media access begins on a smartphone. We live in a Facebook and Twitter world now, and when you amalgamate them with your handheld devices, you've got a powerful weapon in order to stay ahead of the barrage of information that comes your way each day.

My belief is that for buying and selling securities, Twitter is more beneficial to long-term investors as opposed to short-term speculators. Short-term traders are at a disadvantage because by the time you execute an order based on a Tweet, some algorithmic robot has already beaten you to the punch. For investors with a longer time horizon, Twitter is just a great way to aggregate and store information. Based on some recent statistics, others feel the same way, too.

Wednesday's eMarketer report states that Twitter will beat Facebook in U.S. mobile advertising revenues this year. Here is a chart from that article:

If you look at the chart carefully, you can see that Facebook is projected to surpass Twitter in advertising next year and beyond. Facebook has been late to monetize their mobile strategy, but are gaining ground fast. It should be noted that eMarketer is a Facebook bull, and only recently decreased their total sales estimates for the company for 2012. However, there is little doubt that marketing and advertising as we know it is changing in the portable digital universe. I think there is room for both social media companies.

According to the report:

The increasing focus on mobile by both Twitter and Facebook, as well as other major digital advertising publishers, will contribute to growth in the overall US mobile advertising market, which eMarketer estimates will reach $2.61 billion this year. By 2016, the US mobile advertising market is expected to near $12 billion.
This 5.5x growth in mobile advertising in four years is something that both Facebook and Twitter want to capitalize on. With GPS chips in handheld devices, a concept called geofencing comes into play. Wikipedia gives us this description:
A geofence is a virtual perimeter for a real-world geographic area. A geofence could be dynamically generated — as in a radius around a store or point location. When the location-aware device of a location-based service (LBS) user enters or exits a geofence, the device receives a generated notification.
In other words, companies that utilize this technique can offer coupons and discounts to shoppers in their general vicinity that would be more prone to buy their goods and services. This is very valuable to advertisers. Rimma Kats of Mobile Marketer recently wrote an article on the subject. Here are some quotes from her interviewees:
  • Dave Martin, senior vice president of media at Ignited: “Knowing that someone is within 500 feet of a client’s point of transaction might make them worth 10 times more than someone sitting behind their desk at work or at home watching TV. Mobile is no longer optional.”.
  • Chia Chen, senior vice president and mobile practice lead at Digitas: “Over the last 6 months, mobile has become an urgent and strategic priority for many of our clients.".
  • Harald Kruse, east mobile lead and senior strategy manager at Razorfish: “Another challenge is bringing advertisers further along the mobile learning curve to communicate their message in the mobile medium. Current research is showing that consumers will respond to advertisements on mobile, but also that they want ads to be more relevant to the time, place and context of when they see it.".
As some of the quotes state, we want it here and now. No more latency in our lives. I made a wrong assumption not too long ago in thinking social media was just a teenage and twentysomething phenomenon. Not so. I'll leave you with a chart for something to think about if you are of the age to be skeptical about Twitter and Facebook.

Enough said.

Tuesday, September 4, 2012

Facebook: Can 543 Million Mobile Users Be That Wrong?

The big sport these days in the financial blogosphere is to kick dirt on Facebook (FB). In-your-face messianic ranting about including a do-not-resuscitate clause in their corporate charter can get on your nerves. After all, these were the same scribes that considered it a showcase trophy, the cream of social media not too long ago. Although there has been significant damage, to the stock and to the company, I believe this is a superficial wound.

I can understand some of the anger, but can't empathize or sympathize with individual investors that got taken to the cleaners. Investing is a risky game, even for experienced professionals. There were far too many stories of retail investors placing large bets on Facebook, hoping to make a killing, like it was 1999 all over again. Those days are over. I don't want to point a finger, but your money was hijacked by a Wall Street that for lack of a better word, is rigged.

Taking a more cautious approach, and investing from a value perspective is more my style. However, growth at a reasonable price is nice, too. I try to stay away from impulse buys, like recent IPOs, but sometimes from a fortuitous set of circumstances, I'll stake my claim. This is what happened last week when I picked up some shares of Facebook at $19.15. Facebook is not priced at bargain basement levels, but it also doesn't sport back-breaking valuations. For more information about Facebook's econometrics, check out my last posting about the company.

To fund my purchase of Facebook, I once again trimmed back shares of Glu Mobile (GLUU). I'm riding with Glu Mobile for a the long haul, but it's got a big fan base of day traders which inflates the price on occasion. I tend to trade this stock as well as keep a significant amount of shares for investment purposes. Recently, Glu Mobile started rising again, and didn't get too far ahead of itself, but I saw considerable short term appreciation potential in Facebook. I took the opportunity to put the money in the social media giant which could double in a year, if they get their mobile advertising business cooking.

Facebook has over half a billion active members utilizing their mobile application. It's the biggest mobile app worldwide. The problem is how to monetize those users. In a recent article about the lack of mobile advertising, reporter Mark Walsh writes:

One of the memes to emerge from Mary Meeker's influential Internet trends report this spring was that we spend about 10% of our time with mobile, but the medium only commands 1% of U.S. ad dollars. It's since become a rallying cry, in effect, for proponents of higher ad spending in mobile.
You can see that it's not just a Facebook problem. Most companies are trying to understand how best to reach the lucrative demographic of 15 to 35 year olds. Those are the ones that spend 10% of their Internet time with mobile. In my opinion, that percentage is just going to grow as tablets take market share from desktop and laptop computers.

Facebook is a phenomenon in the developed world. For instance, they have very little presence in China, just like Google (GOOG). Let's listen to what Fortune writer Karsten Strauss has to say in a recent post:

China is not afraid to be stubborn about which websites it allows its citizens to access. According to Wikipedia, over 2,600 websites are banned in the nation, including certain Google products, YouTube, Twitter and WordPress...While Facebook is being kept out of Chinese markets, two social networks operating within the “Great Firewall of China” have impressive chunks of market share: Renren (154 million users) and Sina Weibo (300 million users).
I believe Facebook will eventually have to be address this issue in both the desktop and mobile arenas. If they don't, they are ignoring a tremendously potential revenue stream. After all, Facebook's mission is total world dominance, and not generating significant sales from the PRC is going to hurt the top and bottom lines.

Although I'm investing heavily in the mobile sector, I don't use Facebook, or play the freemium games that Glu Mobile produces. It's more of an age appropriate issue. I'm not in the demographic that both these companies covet, but as they lay out their business plans, it's clear to me that their leading positions in mobile could boost my portfolio. Both of these companies have gotten off on the wrong foot since they began trading publicly. Glu Mobile is a turnaround story, and Facebook is the story of 2012. If both of these entities don't have significant upside a year from now, then I'm the dumb money.

Saturday, September 1, 2012

Rumble In The Jungle

In the smartphone market, business looks robust for the next four years, at least according to a recent International Data Corporation (IDC) report. There's a bit of history and mystery in the IDC findings because not only do they compile statistics for 2011/2012, but they also project smartphone shipments to 2016. Data extrapolation is not an exact science, but IDC's business is making prognostications, so I'll pay attention to what they have to say -- especially since it may effect the holdings in my portfolio.

Top Five Smartphone Markets (based on shipments)

Country 2011 Market Share 2012 Market Share 2016 Market Share 2011-2016 CAGR
PRC 18.3% 26.5% 23% 26.2%
USA 21.3% 17.8% 14.5% 11.6%
India 2.2% 2.5% 8.5% 57.5%
Brazil 1.8% 2.3% 4.4% 44%
UK 5.3% 4.5% 3.6% 11.5%
Rest of World 51.1% 46.4% 46% 18.1%
Total 100% 100% 100% 20.5%
Source: IDC Worldwide Mobile Phone Tracker, 2012 Q2 Forecast Release, August 30 2012

As stated in the press release, the big player going forward will be China: "Strong end-user demand and an appetite for lower-priced smartphones will make China (PRC) the largest market for smartphones this year, overtaking the United States as the global leader in smartphone shipments.".

Although worldwide smartphone market share in the United States is expected to decline to 14.5% by 2016, don't forget about the tablet, its larger touch screen cousin. Forrester's Sarah Rotman Epps put out some figures a few months ago:

We now expect 112.5 million US adults to own a tablet in 2016, which will equal 34.3% of US adults. In Europe, the numbers are similarly impressive, with an expected 105.7 million tablet users, or 30.4% of consumers 16 and older, in the EU-7 by 2016. With an assumed replacement rate of two years, cumulative unit sales will be much higher: In the US, we forecast that consumers will buy 292.5 million tablets from 2010 to 2016.
My investing action plan of buying platform agnostic companies in the tablet and smartphone space is on the up-and-up if these research reports are remotely correct in their assumptions. However, I still believe it's the growth in China that will take the wireless broadband infrastructure sector to a higher level. Initially, it will be the smartphone market that may be the catalyst.

As reported by IDC analyst Wong Teck-Zhung:

Looking ahead, the PRC smartphone market will continue to be lifted by the sub-US$200 Android segment. Near-term prices in the low-end segment will come down to US$100 and below as competition for market share intensifies among smartphone vendors. Carrier-subsidized and customized handsets from domestic vendors will further support the migration to smartphones and boost shipments. Looking ahead to the later years in the forecast, the move to 4G networks will be another growth catalyst.
The Chinese do business differently than we do, just like in many other foreign markets. You've got to grease the palms of the party bosses in the PRC, similar to the payola schemes in Mexico. It doesn't pay to be the "Ugly American". It's better to implement money making strategies in foreign countries by their rules.

This bodes particularly well for three companies I have shares in: Velti (VELT), Glu Mobile (GLUU), and CEVA (CEVA). All three organizations have significant relationships in the PRC. The trio are also internationally positioned, which will increase business in whatever continent they are operating.

There is open warfare between Apple (AAPL) and smartphone manufacturers which utilize the Android (GOOG) operating system concerning hardware patent issues. This is a domestic problem in its current form. The recent decision against Samsung may go as far as The Supreme Court. No matter what happens, it still won't stem the tide of smartphone and tablet adoption globally. From my vantage point, this is a sector that is about to detonate, if not by the New Year, then certainly by Summer of 2013. China will play a big part.