Game On For Nvidia

They say you can't make an omelet without breaking a few eggs, and, that's exactly what Nvidia (NVDA) did on May 9th when they announced they are buying Icera, a producer of baseband processors. With the acquisition, Nvidia expands on its core competency of GPUs (graphics processing units), and, is essentially throwing down the gauntlet, and, climbing into the ring with wireless industry heavyweights Broadcom (BRCM) and Qualcomm (QCOM).

Because of the consolidation of not only the semiconductor industry, but of chips themselves (think Moore's Law: The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years), Nvidia felt it was a move that had to be made for them to be viable in the future. According to Nvidia's latest conference call, "Icera is the pioneer in next generation wireless modem technologies called software-defined radio or SDR technology. They have created an ultra-low power, high performance processors, specifically, specially designed for processing multiple modem protocols.".

What does all this mean in English? It means that wireless devices using their chips will work on LTE, 2G, 3G, 4G and Wi-Fi networks. And as Matthew Murray reports in PCMag.com in his article Nvidia to Acquire Baseband Processor Developer Icera: "This lets manufacturers develop for multiple products from a single platform, while reducing development costs and times and enabling easier support for future standards.". Not only will consumers and manufacturers benefit from this product, but Nvidia probably will, too.

Although the market for baseband processors is one of the fastest growing segments of the technology sector at an estimate of $15 billion a year, you need to consider some issues with Nvidia before you go out and purchase their shares. As CEO Jen-Hsun Huang said in the conference call referring to the Icera deal, "...we expect the acquisition to be slightly dilutive for the remaining part of the year.". According to Yahoo Finance, out of the 32 analysts that cover the stock, 20 have a hold on it and that tells you something right there. Let's take a look and see what this hesitancy is all about.

Nvidia as a company has always had good body language, a little swagger in its walk because of its impressive heritage. Barrons scribe Jay Palmer in his 1/22/11 article The Next Picture Show says: "The company invented the chip that produces computer graphics and, despite some intense competition, still dominates the fast growing graphics-processing business.". Nvidia's chips are the defacto standard on most personal computers and notebooks, and, according to a 5/10/11 CitiGroup (C) research report by Glen Yeung, "85% of revenues (are) derived from the PC and workstation market.".

Dominating a market is one thing. Dominating a market with minuscule growth is another. Aaron Ricadela and Dina Bass writing on Bloomberg.com on 5/17/11 in their piece Hewlett-Packard Cuts Full-Year Forecasts as Consumers Hold Back Buying PCs look at some eye opening statistics: "The industry's shipments declined 3.2 percent last quarter, research firm IDC reported in April. Tablets will almost triple this year, IDC projected in January.". And tablets and smartphones is where Nvidia wants to be and has made appropriate steps to get there. They see a big pocket of opportunity.

Before we go on here, we need to backpedal a bit to the evolution of the semiconductor and to Jay Palmer's Barrons article as he explains the current state of the computer chip: "The power and speed of a computer used to sit in its central processing unit...the brain of the device. No longer. Nowadays, the computer's GPU, or graphics processing unit, whether as a stand-alone chip or built-in next to the CPU, is every bit as important to performance, sometimes much more so.".

To capitalize on this development, Nvidia recently released their Tegra chip to much fanfare, which essentially integrates the GPU with the CPU and is designed explicitly for mobile computing. It's catching on fast. In the recent conference call, Nvidia executives noted: "Our Consumer Products business, which includes Tegra processors and embedded products achieved record revenue of over $122 million. The record performance is due to our first group of Tegra 2-based Android products hitting the market...based on market research from In-Stat, tablets represents the fastest-growing segment of mobile processors, with compound annual growth rate of 124% from 2009 to 2014. We continue to drive the lead role in the Android tablet market...".

I think the key word from that last paragraph is Android, which is Google's(GOOG) operating system for smartphones. People tend to use Android in discussing Google's operating system for tablets too, but that is actually called Honeycomb. Whatever you want to call it, Google and Apple (AAPL) are in a head-on collision when it comes to the inner workings of mobile devices. In fact, according to Fred Vogelstein in his recent article in WIRED Magazine How the Android Ecosystem Threatens the iPhone, "In 2010, Android's share of smartphone sales exceeded Apple's for the first time.". iPhone's smartphone market share is 15% where Android now commands 22%.

As a stock price, Nvidia has the potential to advance nicely with their competetive advantage in the Android space and is in bed with Google. CEO Jen-Hsun Huang commented about this relationship in the conference call: "...we're working very closely with Google on Ice Cream Sandwich, and it's is a very important new generation of operating system based on starting from the Honeycomb base....so we're working very closely with the Google team, and Tegra will surely be wonderful for Ice Cream Sandwich when it comes.".

When it gets here won't be for awhile, Q4 2011, but, besides the lucrative tablet space, there is still the smartphone sector which continues to grow rapidly. CitiGroup analyst Glen Yeung comments on this in his 3/9/11 report: "With smartphone units estimated to approach 650 million in 2014 (24% 3 year CAGR), competition in the apps processor space will be fierce. Kal-El, Nvidia's quad-core successor to Tegra 2 is currently sampling. We note Nvidia is nearly a year ahead of the competition, with quad-core chips from Qualcomm (QCOM) and Texas Instruments (TXN) not expected to sample until 2012.".

So what we can surmise here is that Nvidia chips could very well be to Android mobile devices what Intel (INTC) semiconductors were to Microsoft's (MSFT) Windows operating system. This could possibly mean that the boom and bust cycle for Nvidia's chips may not be as severe as in it's previous incarnation of just a GPU vendor. And speaking of Intel, they've just entered into a new $1.5 billion, six-year cross licensing agreement with Nvidia and both parties are terminating all outstanding legal disputes, to paraphrase Lester Ratcliff in his 4/8/11 ValueLine report for Nvidia.

Consensus analyst earnings for the company as posted on Yahoo Finance are $1.04/share for this fiscal year ending in January 2012, and, $1.24 for the year after. At roughly $18 a share we get P/E Ratios of 17 for this year and 14.5 going forward. That's very respectable when you consider the the potential market Nvidia is addressing. However, it should be noted that although earnings are increasing 60% in fiscal 2011, they are only projected to grow by 25% in fiscal 2012, so comparisons could get dicey. Nvidia encountered a similar situation during the previous quarter when they experienced a 1.7% drop in earnings and the stock paid the price, dropping almost 9% overnight.

With the introduction of the Tegra chip, there was a lot to like about Nvidia along with their already successful lines of GPUs. When they purchased Icera, it's a whole different dynamic. To quote Matthew Murray from PCMag.com again: "Icera has been granted, or has pending, more than 550 patents, and it's high speed wireless modem products are used by more than 50 carriers worldwide." Nvidia has expanded its revenue opportunity and enables them to reach a much broader market.

I don't mean to sound like a broken record, but I must reveal full disclosure in these postings and I am sitting in cash and have short positions in the S&P 500 and the Russell 2000 via inverse ETFs. I've been wrong about the direction of the market for a year and a half, so you should take my investing decisions with a grain of salt. That said, I really like Nvidia. I've owned the stock before and plan to buy it again if the market drops down to more advantageous levels. At the time being, I am taking a pass on it along with all other equities. We haven't had a significant correction for some time and I'm just going to wait.

NetApp: Best of Breed

NetApp (NTAP) has the kind of problems most companies would love to have. In the last earnings conference call on 2/16/11, CEO Thomas Georgens reported the company missed analyst expectation because of a shortage of materials that go into their new mid-range networked attached storage systems. It seems that the demand was too great for NetApp to keep up with the orders. As Georgens explained: "...we've introduced products before, but this one actually had four times the take-up rate of any of our previous products. So clearly the ramp is pretty steep.".

Shares traded down from its 52 week high of $61 at the time of the announcement to a near term low of $44.50 on April 8th. They have since bounced back to $54 in anticipation of the next earnings report on 5/25/11, but, as Georgens cautioned in the previous conference call about the materials shortage: "As we go into the next quarter, our guidance currently reflects the fact that we've not resolved these problems yet. We're working on them. We think we have approaches that resolve them, but it did cause us to take some consideration here with respect to whether or not we get all the parts...".

If you're not familiar with NetApp, the name resonates with an elite set of products and services in network attached storage, which is an integral part of virtualization, which is an integral part of cloud computing infrastructure. It's worth repeating that the build-out of the cloud is going to be a secular phenomenon that will last till the end of the decade. CEO Georgens sets the table on this opportunity in a 12/30/10 interview by Brian Deagon in an Investor's Business Daily article Opportunities for Investors in IT Buying Cycle: "The prolonged economic slowdown has caused a slowdown in the IT refresh cycle. In a lot of cases IT infrastructure is getting old and companies are looking at what to do next...The technology infrastructure in place the last three to five years isn't the architecture of the future.".

NetApp is the leader in network attached storage and their products are considered the crown jewels in the industry. In a 3/16/11 Credit Suisse analyst report compiled by Deepak Sitaraman, Kulbinder Garcha, Vlad Rom, Alban Gashi, Andrew Muench and Adam Khorshid, they indicate that the move to the cloud and virtualization should be a boon for companies like NetApp: " One of the key consequences of virtualization and mobile virtual machines is that it provides an inherent advantage to network attached storage. Because virtual machines move from one server to another, the data needed by that virtual machine needs to be consistently accessible. Since networked storage is attached to multiple servers, it is able to be used in such a capacity.".

I don't like to use sweeping generalizations or blanket statements, but these cloud computing infrastructure pure plays like a NetApp, Acme Packet (APKT) and VMware (VMW) have overwhelming stories and have been stellar performers ever since the market's run began in early March of 2009. The 4/8/11 ValueLine report by Theresa Brophy gives you an indication just how fast NetApp is growing as compared to last generation storage systems: "NetApp believes it can grow at two to three times the market and also expand its geographic presence.".

CEO Tomas Georgens in the last conference call expounds on this growth story: "...we're still 15% or so market share. And so I still think there's plenty of opportunity. So in a $15 billion market...growing at 7% or 8% per year, that's a big opportunity. We're number one or number two in market share...". Earlier in the conference call he enunciated: "...the gap between our growth rate and that of the storage business of our nearest of the four largest competitors is nearly 30%. The greatest separation we have seen since we have started doing this analysis.".

One thing that caught my eye in not only the conference call transcript, but also in another Investor's Business Daily article by Brian Deagon titled NetApp Sinks as Q3 Sales, Q4 Profit Outlook Miss published on 2/16/11, was the exposure, or lack there of, to government entities. Deagon reports: "Analysts have been worried about NetApp's sales to the public sector in light of massive budget issues facing governments. NetApp said public sector sales rose only 8% in Q3, vs. 59% in fiscal Q2.". In the conference call, CFO Steve Gomo addressed the issue: "And the other big mover of the entry-level products is actually Public Sector. And while the Public Sector business shipments don't look that impressive, that business is actually quite healthy for us.".

Cisco Systems (CSCO) recently reported that a reduction in government purchases of their products would really hurt business going forward and the stock paid the price as investors lowered the boom. As mentioned earlier, NetApp was also punished after its conference call but has since recuperated some of its losses and has a much brighter future in regards to share price appreciation than the much larger Cisco.

By no means am I throwing Cisco under the bus, but I believe that their days of leading the tech sector is a decade behind them because of the law of large numbers, much like EMC (EMC) and Microsoft (MSFT). This isn't the 90's anymore. In fact, EMC is NetApp's largest rival and as CEO Geogens said in the conference call: "...the real key component there is that NetApp has become the innovation yardstick by which EMC is measured, and I think at least that part we felt good about.". I am not suggesting that NetApp will have the same success in the teens that EMC had in the 90's, but I believe they will be amongst the tech leaders when all is said and done.

According to Yahoo Finance, 37 analysts cover Net App with a breakdown of: one is an underperform, twenty say to hold the stock, and, the remaining sixteen say it's a buy or strong buy. I contend that's an endorsement and if the hold ratings get upgraded, the stock could experience more momentum to the upside.

Consensus analyst earnings estimates give it $2.05/share for 2011 and $2.25/share for 2012. In distilling the numbers, that gives us a P/E ratio of 26 for this year and a P/E ratio of 23 going forward at it's current price of $53. That's very reasonable when you take into consideration the earnings growth of 35% for this year. However, next year earnings are only slated to grow around 10% although the 5 year CAGR (compound annual growth rate) is expected to be 20%. I believe the easy money has been made in NetApp, at least in the near term when you consider the advent of supply shortages and the slowdown in government spending.

If you've been following my posts, you can ascertain that there is a dichotomy in my financial leanings. As stated earlier in this article, I think we're in the early innings of the buildout of the cloud and that the next ten years will provide investors with ample opportunities to increase their assets, just like the last two years if you were early in on some of the high fliers in the Internet 2.0 infrastructure plays. That said, I think the market has had an incredible run and is due for a breather because of headwinds like Middle East uprisings, the debt crisis in Europe and the United States, and, a nuclear melt-down in Japan. If I am right with my assessment, there will be better opportunities to buy quality companies like NetApp. If I am wrong, I'll be a day late and a dollar short.

TIBCO Software: Context is King

The lexicon of the digerati can be complicated and confusing for those on the outside looking in. This is especially true for enterprise software because it's not as easily a defined product for the masses like a smartphone or a tablet. The inner workings of this corporate software is usually shrouded in secrecy and no one seems to care if it's working properly, or, unless you want to invest in a company that produces it. I'm a firm believer that investors should know the companies they are investing in and with the advent of Internet 2.0 and Enterprise 3.0, due diligence is required to command the language of the new frontier.

TIBCO Software (TIBX) is one such 21st Century organization that manufactures and develops middleware for the enterprise environment. If you are wondering what middleware is, it basically functions as a link between two other programs, such as a Web server and a database program. Middleware also has a more specific meaning as a program that exists between a "network" and an "application" and carries out such tasks as authentication, to paraphrase the Salon.com technology glossary.

For instance, if you are shopping for a sweater online at The Gap (GPS), "behind the scenes, middleware made sure that the store’s inventory database showed that sweater is in stock, connected to the charge card company’s database to make sure that your card wasn’t maxed out, and connected to the shipping company database to verify a delivery date. And, it made sure that hundreds or thousands of people could all shop that site at the same time.". That last quote is from a terrific article by Len DiMaggio in Red Hat Magazine titled What is middleware? In plain English,please.

Now you might think that middleware is a fairly established and saturated software sector and you may be right. The latest S&P Report compiled by Zaineb Bokhari states: "Worldwide revenues for the Application Deployment Software segment in which TIBX participates rose 2.2% in 2009, to $14.9 billion, according to market research firm IDC.... Longer term, IDC expects sales of Application Deployment Software to increase at a compound annual growth rate (CAGR) of 4.2% from 2008 through 2013, reaching $18 billion.".

An industry growing a little over four percent per year is not exactly cooking on all four burners, but just like the consumer market, the corporate sphere is expanding rapidly with the advent of mobile computing, cloud computing and social collaboration. That's where TIBCO comes in. Besides a 14% R&D budget to expand on their offerings, the company made five tuck-in acquisitions last year and recently introduced a new service called tibbr which has received much fanfare.

In a 1/24/11 article on ZDNet, TIBCO launches tibbr: Enough to make Enterprise 2.0 viable?, author Dennis Howlett speculates that the company has a big advantage in corporate social networking because of the easy to use Facebook like interface that requires no IT assistance: "Unlike other systems, I wasn't left thinking that this was a solution looking for a problem. It has a much more of a self evident feel than other systems I have seen.". In essence, it works. In going back to the simplification of Silicon Valley speak, Orly Seidman in his 4/22/11 ValueLine report on TIBCO says tibbr: "...enables users to incorporate social computing and real-time communication in business applications.". ZDNet's Howlett also comments: "It intelligently marries people, processes and context, delivering information the way people want to consume.".

In the most recent earnings call transcript, CEO Vivek Ranadive expounds on the operative word 'context' by enunciating: "Whereas content was king in the 20th Century, TIBCO will prove that context will be king in the 21st Century.". That's a tough order to fill especially since the 21st century still has 89 years to go and brings us to the question of: 'How much do you want to pay for company like TIBCO Software?'.

The stock has already gained 600% since the March 2009 lows and has hovered at around $30/share with recent rumors of a Hewlett-Packard (HPQ)buyout. Apparently, HP CEO Leo Apotheker and TIBCO chief Ranadive couldn't agree on a price. In a 4/13/11 Motley Fool article by Anders Bylund Why HP Wants TIBCO, the author reports: "Reuters found two anonymous sources who agreed that buyout talks have been happening but 'fizzled' about two weeks ago.". The article also stated that TIBCO has been stealing market share from Oracle (ORCL) and IBM (IBM).

If video killed the radio star and Netflix (NFLX) killed Blockbuster, I would think the erosion of marketshare by IBM and Oracle would be a big deal for them if tibbr is as good as it's hyped up to be. We are talking about the elimination of corporate e-mail with this product. There will be a new way to communicate in real-time in cubicles across the global panorama. TIBCO may be better off going it alone if this disruptive technology is as good as it's cracked up to be. After all, there is a large slice of the pie to capture.

That S&P Report by Zaineb Bokhari gives us a breakdown of this industry: "Based on 2009 vendor shares presented in an IDC report published in May 2010, TIBX ranked sixth in worldwide sales of application deployment software, with a 2.7% market share. Market leader International Business Machines held a commanding 32% share, and Oracle Corp. 16%. The top-five market participants in this segment held a nearly 60% share in 2009, up from 59% in 2008.".

Before you go rush out and buy TIBCO shares thinking tibbr is the big to-do, or the be all end all, let's take a look at it's valuation. Only 11 analysts cover the company according to Yahoo Finance. Of those analysts, six have a hold while four have a buy and one has a strong buy. The broker's reports I read by both ValueLine and Standard & Poor's seem to feel that TIBCO has a bright future ahead of it, but they are reluctant to place a bet on the stock at this juncture because of it's lofty metrics.

Consensus earnings estimates for 2011 and 2012 are $.91/share and $1.06/share respectively. Trading around $30/share, that gives us a current year P/E Ratio of 33 and a forward P/E Ratio of 28. That's not too bad, but after impressive earnings growth of 25% per year the past five years, earnings are only supposed to grow by 15% a year until 2016. Just examining the projected growth from 2011 to 2012, you can see that things are slowing down although this hasn't been corrosive to share price because of the HP takeover speculation.

I would think that if you are fast and loose trader, you could take a gamble on a small cap equity like TIBCO to see if indeed Hewlett-Packard acquires them. I imagine you'd get a nice pop in the stock. However, if you've got a longer perspective, I would tend to believe that a security like TIBCO may correct from these levels because the stock itself, cloud computing companies and small cap stocks have all had incredible run-ups (just look at the Russell 2000 the last 8 months). They say you can't start a fire without a spark, and if tibbr is the disruptive technology that Ranadive thinks it is, it will be an evolutionary process, not a revolutionary one. That's why I'm just going to watch this one for awhile. The price will come back to me; if it doesn't, I'll just find something else to invest in.

VMware: The Sweet Smell of Success

They say that 75% of the earth is covered by water and the remaining 25% is covered by VMware (VMW). That's how much of a strangle-hold they've got on the server virtualization industry. About a year ago they commanded an 80% market share according to ReadWriteWeb which is sponsored by Intel (INTC) and VMware. In addition, the company has a 95% penetration rate among Fortune 1000 companies as reported by Standard & Poor's. Now that's what I call coming from a position of strength.

Besides a quality product, much of this dominance can be attributed to their hardware partners Hewlett-Packard (HPQ), Dell (DELL) and IBM (IBM) who are all pre-installing VMware's vSphere product on most of their new servers, to paraphrase a 4/19/11 article in Investor's Business Daily.

If you aren't familiar with what virtualization server software does, it is basically the straw that stirs the drink in cloud computing. To quote the earlier S&P report, "Virtualization software allows multiple virtual machines with different operating systems and application software to run on a single physical machine.". Think Apple (AAPL), Microsoft (MSFT) and Google's (GOOG) Android all in one package. It enables data centers to reduce hardware expenditures, energy consumption and employees which in turn increases savings.

Although market research firm IDC estimates corporate cloud computing is expected to grow at a blistering pace of more than 25% a year to $55.5 billion by 2014, VMware has recently come under attack because of the competition. Oracle (ORCL), Microsoft, Citrix Systems (CTXS) and Red Hat (RHT) have all fired shots across the bow of the VMware juggernaut putting some pressure on the stock in January, February and March. That was then, this is now.

In late April they reported industrial strength 1st quarter earnings. It was a piece of art and VMware hit all the right notes. Earnings grew 50% beating analyst targets. This is not an illusion. Even the company was surprised. In the conference call transcript, CFO Mark Peek reported that: "The financial and business results from our first quarter of 2011 exceeded our expectations.". Besides earnings, sales were up 33% from the year before and the stock responded, gaining over 10% the next day, rising from $86 to $98. The equity remained elevated for a week, but has since come down some to $93 as the overall market has corrected.

It's no secret that we are in the beginning of the post-PC era with the proliferation of mobile computing devices like smartphones, laptops and tablets. Virtualization software plays an enormous part in the infrastructure of the cloud which is an integral part of the post-PC architecture. The question remains, how much do you want to pay for a stock like VMware? The 37 analysts that cover the stock are pretty much divided on what you should do: nineteen have a hold, one is an underperform while two say to sell. The remaining sixteen have either a buy or strong buy rating.

If we examine the consensus measurables as reported by Yahoo Finance, we can see that the trailing twelve month P/E Ratio is a whopping 99. I don't make this stuff up, but it's not where the earnings have been, but where they are going that counts. Profits for 2011 are slated to be $1.97/share and for 2012, $2.33/share. At the current price of $93, we get a 2011 P/E Ratio of 47 and a 2012 P/E Ratio of 40.

Those aren't astronomical figures when you consider earnings were up 50% last quarter, but like I just said, it's not where they've been, but where they're going. If you look at the estimated earnings growth rate from 2011 to 2012, it's only 15%, which gives it at PEG Ratio (price/earnings/growth) of roughly 2.7 for next year. That's on the high side. Sure, analysts could be low-balling projections, but it makes me wonder how much of a window of opportunity is open for VMware in the next two years in regards to share price.

This is not a boring and predictable stock. Although VMware has reported show stopping numbers, the security has had anything but a straight ride from a 52 week trough to top - $54 to $98. In fact, from last August to the present, the share price has hit $75 three separate times and the upper 90's twice. That's a lot of wiggle room. To stoke the debate, I contend that the stock may languish for a year or go lower as the market takes a rest from the two plus year historical rally. With a Beta of 1.48 and a prominent position in the inflated cloud computing sector, VMware could very well trade much lower in the Summer months.