It’s been a busy Q2 and early Q3 for NXT-ID (NASDAQ:NXTD) but the stock price doesn’t reflect it. We took this moment to update the story and our model based on recent events.
The net is that the risk/reward on the shares has never been better given our IV estimate of $7.52. Click on the image to download a PDF of the report.
Amazon ($AMZN) is a controversial stock these days to be sure. We see 3 to 6 notes a day from short sellers about how this company is wildly overvalued / about to crash. The funniest one though is the recent flurry on the back of Target saying they would no longer sell the Amazon Kindle.
Does anyone else think this is similar to publishers saying they won’t sell books on Amazon and music labels saying they won’t do business with Apple? You may not like it but stopping it is not an option.
As a family man I like Target ($TGT). Considering the way kids go through clothes you have to love the folks at Target for letting you get new wardrobes for your kids at remarkable prices. It’s also great for plastic containers, household supplies and stuff like that. My first reaction to the story that they were going to stop selling the Amazon Kindle was “what they sell electronics?”
Target has tried to be more relevant online but never succeeded. They sell the kind of stuff you go to the store for. Amazon and Target should actually be good partners. Target management should really think about that. You aren’t really competitors. Amazon doesn’t have stores remember?
Target may think that selling the Kindle is aiding and abetting the competition. The short-sellers on Amazon suggest that “Best Buy will be next!” Maybe they will. Both companies give you another reason not to visit their store. Which by the way we can tell you is 100% linked to success. If you have physical assets and fixed costs like Best Buy the whole point is getting more bodies into the store and increasing the propensity to buy just a little tiny bit. That’s all there is to it. Getting philosophical gets you into bankruptcy court. Just ask Circuit City.
The time to stop Amazon was at least 10 years ago. Too late now. On the retail side there is such a big fundamental difference which Target can never even hope to address: selection, availability and price. If I need a garbage can I’m going to Target. I know they have a few and one will be find. But if I want a DVI to VGA cable? What about a pair of 12″ scissors? Clay Shirky’s new book? Flax seed flour? In some cases yes or maybe but they might also be out of stock. So you just pay for prime and buy everything at Amazon. Prices are good and everything arrives at your doorstep in 48 hour or tomorrow if it’s worth $4 to you.
There are concerns of course. What about margins? What’s the right multiple for this? Etc. But arguing that somehow Amazon is going to be dealt a “blow” by Target or Best Buy reflects a basic misunderstanding of the market, consumer experience and the business.
This is the first of a three part look at Amazon that will shift into their cloud services and then into eBooks. The SoundView TechFund (which we advise) is long Amazon stock as a core position.
The biggest reason to own Amazon in the end may be Jeff Bezos. Steve Jobs is gone. Steve Ballmer is clueless and based on what we see at Target, they don’t get it either.
Background
We recently added iPass to our mobile ecosystem and decided to take a quick initial look at the company. This is a very small company but the financials and valuation are attractive: Market Capitalization = $88m, Cash = $30m, Revenues = $156m (but not growing), and recent near-break even operations.
iPass provides WiFi access and management services to enterprise clients. This is an area of expanding demand and iPass has a large number of partnerships and provides their services to carriers who resell them under a ”white label” arrangement. Carriers are key distribution partners and can expand in time to create a path to the consumer. Telstra, Colt, and Deutsche Telecom are all partners. Deployment time seems long and takes multiple quarters, which tends to dampen near-term growth in the face of these partnership deals. These companies had relationships with the older iPass solutions and have been ”radically refreshed” with the new open mobile offering.
Management is telling investors that 2011 is a year that they can rebuild into a growth company on the strength of their ”open mobile” enterprise platform. The company will lose money in 2011, which will require investors to be patient. Ultimately, they believe they can use their platform to address the larger mass market opportunity for mobile access and applications outside of the enterprise.
Without spending lots of time on the subject, the company has had a checkered past that included some shareholder activism back in 2006. New senior management came into the company in 2008 and 2009, which explains some part of their shifting strategy and revenue declines in the last two years.
Positioning
So what does iPass really offer? From an enterprise perspective, it’s relatively simple. If you work for a large company and need data access on the go, there are often instances where additional options are needed to connect – places like airplanes, airports, hotels, and convention centers to name a few. Instead of a corporate user having to pay a per-access charge, they set up accounts for their employees who can then access these WiFi networks by signing in. iPass provides tools for enterprise customers to manage employee accounts, usage and deliver support.
In short, iPass provides a ”bridge” technology solution for enterprise mobility that improves network access, adds flexibility and does it at a low enough cost that it might even save money in situations where wireless broadband coverage is limited. As employees typically carry two to three IP-addressable devices (phone, laptop, tablet), the need for additional wireless access expands.
Valuation & Conclusion
Peer analysis of this space yields a very mixed bag of valuation ranges. For example, companies like Motricity ( $MOTR ), Cogent Communications ( $CCOI ), and even EarthLink ( $ELNK ) trade at some multiple of sales. But companies like RealNetworks ( $RNWK ), Openwave ( $OPWV ), and iPass ( $IPAS ) trade at well under 1x sales.
The $30m in cash (50c / share) gives the company plenty of security to plan for the next few years, despite anticipating adjusted EBITDA losses of $5m for 2011. Looking at Intrinsic Value, the shares appear undervalued by a reasonable margin. A basic case that factors in a return to very modest growth yields an IV of $2.25.
That 50% upside isn’t bad but might not be realized in 2011. Revenue growth won’t occur until 2012, which means that 2011 will still be a year of no growth and quarterly losses. From what we can tell, management would probably endorse the forecast we put together to support the IV. This means that if we have only the enterprise scenario to rely on, growth will be limited even into 2015. However, one potential wildcard is the consumer, but that’s also one on which we don’t think that iPass has visibility at present.
[Disclosures: none]
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The music industry has been in turmoil for a decade and the longing for the old days of fat profits and content control was palpable at a gathering of industry types at the Digital Music Forum last week in NYC.
We’ve got two clients, Amalgam Digital and JamHub, in the music space that are in the middle of this swirl of creative destruction. Amalgam Digital is at the frontier of bringing experience and social aspects of music into the equation of online content discovery and commerce. Many visionaries describe the future of music and particularly revenue as being more “experience-based.” Unfortunately for the industry that means that figuring out how to scale revenue and profits again won’t be easy.
What follows is a summary of the key points that came out of the presentations and discussions at the event. Some of these points were also touched in in our November Thought Leader Interview with music executive Jeffrey Epstein (PDF).
1. The core business of records continues to wane. The shadow of Napster – now a decade old – hangs over the major labels and the industry in general. One panelist noted astutely that suing your customers is not a viable long term strategy. Some 20 million music buyers have been lost over the past five years. Legal digital downloads at $0.99 or $1.29 is not a panacea, as once thought. Less the one-fifth (23%) of people with access to the internet purchase digital downloads. The music industry longs for a revival of the record business but still hasn’t a clue as to how that might come about. Even as the industry tries to adjust to the digital world it keeps evolving, and now the migration of music into “the cloud” forces another shift on the industry.
2. Music is migrating to the cloud but few know what it will mean. A subscription model is an obvious path, but many industry executives remain skeptical. Streaming music is still a foreign concept to many consumers, although smartphones and the emergence of Pandora (which is giving Muzak a run for its money) are quickly educating the public on streaming music technology. Currently, only 5% of Internet users subscribe to a music service. This works out to a per capita spend of only $2.
Christina Collo, Director of Music Relationships & Strategy for Microsoft, noted that there was some modest success with their music subscription service. Microsoft offers subscribers the ability to download 10 MP3s per month as part of a $14 monthly subscription. In a private conversation during one of the breaks, Christina told me that most subscribers do not download the allotted 10 per month. The Microsoft model is intriguing and they may be on to something, which is saying a lot because Microsoft is not very associated with innovation, especially in the music space.
Not surprisingly, there was a lot of buzz about Spotify. The company has been signing up major labels to launch a service in the U.S. – recently, Sony and Citibank-controlled EMI – and there are rumors of a pending deal with Universal. However, many industry observers don’t think a U.S. launch of Spotify is imminent. Spotify is reportedly raising $100 million at a $1 billion valuation. Some industry veterans were wondering if Spotify is worth $1 billion (the valuation works out to roughly 7-8 times last year’s estimated sales, which seems lofty for a music company, but not for a social networking enterprise).
There was a consensus that Apple will launch a music service later this year. Apple acquired Spotify-like Lala.com last year. Many were concerned about how Apple’s recent subscription announcement would impact iTunes and its music ecosystem.
In sum, we are in the early stages of seeing music migrate to the cloud. This movement is likely to accelerate in the months ahead as Apple, Spotify and Google roll out cloud-based music subscription services in the U.S. this year. Another company to keep on the radar screen in the cloud space is Rdio, which was founded by the guys that launched Skype. Rdio is marketing their cloud-based service as “unlimited music, anywhere” and currently is offering two subscription packages priced at $4.99 and $9.99 per month.
In terms of hardware devices enabling music anywhere, Sonos was at DFME marketing their product. The Sonos player is a Bose-like system that enables music playing in any room through wireless streaming. Users can control the Sonos unit through a smartphone, laptop, iPad or tablet device. The Sonos system seemed attractive, but a little pricey at $400 per unit.
3. Most are toying with social media and waiting to see how it will impact music. There are one billion people using social media. Facebook has over 500 million users and is sporting a $50 billion-plus valuation; Twitter has over 200 million users, and LinkedIn is doing an IPO. Dermot McCormack, EVP of Digital Media at MTV, noted that his company is leveraging all the social networking technology in a big way to promote artists and engage fans. There was little talk at DFME about MySpace, which has fallen off the map and is reportedly up for sale. It remains to be seen whether Apple’s Ping will emerge as a meaningful music social network in the future. Everyone is eagerly waiting to see what Google does in the social music media space. YouTube is a major force in music today, with some 60% of fans listening to music via YouTube. Wiredset CEO Mark Ghuneim noted that if people clicked on the ‘buy’ links on YouTube videos and Facebook posts, we’d all be rich men. His comment resonated well with another panelist who observed that “people play what they don’t buy and buy what they don’t play.”
4. There’s some renewed interest in financing music startups. John Boyle, CEO of the BAM Group, noted that VC money is coming off the sidelines. He said that valuations and return expectations are lower, and investments are more diversified than previously. Venrock VC David Pakman said he is focused on social music investment opportunities. He also mentioned he thought there was a multi-billion dollar opportunity in a streaming-based advertising service. Several panelists mentioned Pandora’s forthcoming IPO and thought that the company had a lot of upside in the months ahead. A successful Pandora IPO will spur more private investing in the music space.
John Boyle stated that he thought 2011 would be the year when companies in many of the music verticals that have emerged over the past several years would begin to gain traction in the market. John didn’t volunteer any names regarding who might be the key companies to watch in each vertical. Readers are encouraged to check out the appendix of our interview with Jeff for more information. We will be closely watching the evolution of the various music verticals in the months ahead for signs of emerging winners.
Conclusion
While many people in the music business like to blame their woes on technology and technological change, the industry has itself to blame for many of its problems. This comes through loud and clear in the movie Before the Music Dies. This a great film and a “must see” if you are involved in this space.
There are quite a few companies beyond the music companies themselves with major stakes in how the reshaped industry looks in a few years. In addition to private companies like Pandora, Spotify, and SoundCloud we know that Apple, Google, Amazon and Microsoft will all be vying for a piece of this market. Mostly lost in the shuffle is Real Networks (RNWK) which has languished for years. Is there any chance they can reemerge in this space?
Nokia has made some big waves in the last week. First, with the big ”out of the fire and into the icy waters” memo from the new CEO, Stephen Elop. Second, by announcing a sweeping partnership with Microsoft which makes the new Microsoft mobile OS technology the center of the Nokia strategy.
The move is major and quite abrupt. Just two months ago, Nokia was touting their ”next generation UI” on top of their own Meego platform as a game changer over iPhone and Android. Of course, nobody believed them which probably made it easy to abandon this strategy.
Fans of Nokia are distressed and unhappy. Everyone else seems to think this won’t help either company much since they have both missed the revolution in mobile computing that has occurred in the last three years. Before the events of this last week, we had officially condemned Nokia to a slow but inevitable death in our note posted on August 14th that focused mostly on the need for Research in Motion and Nokia to wake up and embrace a platform like Android.
But what about now? It’s been a few years since we sounded the alarm and published ”Mobile Internet: Time to Pull the Trigger” in June of 2008 and highlighted the urgency to get portfolio exposure to mobile. At that time, Nokia wasn’t worth considering so we focused instead on Apple, Google and Research in Motion. Nokia was a prominent member of the mobile Internet ecosystem but one that has only been in decline. My guess was that Microsoft would acquire Research in Motion to shore up the enterprise mobile market but that hasn’t come to pass, at least so far.
However, the letter from Stephen Elop looks like the right medicine to me. Until that letter appeared, Nokia was living in a fantasy world in which they were a leader. Recognizing the depth of the problem is a first step. But the letter is just rhetoric; until it’s backed up by decisions and actions that illustrate a departure from the past, it’s just so much eyewash.
Now we have the announcement of the big Nokia – Microsoft partnership. There will be piles of analysis coming on it but at a high level we know that the current version of the Windows mobile OS is actually not bad and works well with both Facebook and XBox. It’s not an iPhone killer but it’s also not DOA either. Smart, thoughtful people who have used both the iPhone and Android have spent time with it and while it still doesn’t fit most users, it’s not garbage. Way to go Microsoft! 😉
Before looking at the major moving parts objectively, let me get it out of the way – the management teams of these two companies, particularly Steve Ballmer, have an abysmal record of understanding technology and the underlying markets, and putting strategies and programs in place that make sense. Our position on Ballmer was made clear last June with our note, ”Microsoft’s Future is Hopeless with Steve Ballmer.”
Let’s take a look at the strategic partnership with soft eyes and at least review the potential:
OS: Nokia needs to embrace a different OS. Months ago, we thought it should be Android but after witnessing the success of Samsung, HTC and Motorola it’s pretty clear Nokia would not have fared so well on Android. Microsoft is a very mixed bag of technologies and execution but in the consumer OS department they can hold their own. They are not a bad OS partner from a technical standpoint.
Apps: This could be a good story. Although the Nokia ”OVI Store” is a joke, some applications like OVI Maps are quite strong. Microsoft also has a large base of Windows applications, tools and distributed architecture that developers have spent decades developing for. Until Nokia, these developers had no path but Nokia is still large enough to represent an attractive alternative for them.
Cloud: Applications, content and use cases in the cloud are still in the early stages. Neither Apple nor Android has all the issues squared away as of yet. As an Android user I can say it works very well, but feels disjointed. Apple has a more integrated solution, but it’s closed. Microsoft Live actually has some good features that makes Microsoft Office work better in the cloud in many ways than Google Apps. We use both extensively.
Unfortunately, the success of all this integration depends mightily on execution. The usual management proclamations of ”overcoming challenges” and ”moving swiftly” to ”disrupt other mobile ecosystems” seem comical coming from these management teams. Is there any joy inside these companies about this strategy?
Are designers, developers, managers and engineers excited? It’s hard to imagine this working out if that’s not the case. Maybe next week at the Mobile World Congress some clues will emerge. The first set of disruptions is likely to occur among Nokia middle management and staff along with long-suffering but faithful users.
This morning, we did a quick Intrinsic Valuation analysis of Nokia and using what appear to be conservative assumptions, we arrive at an IV of $20.
[Disclosures: none]
Just reviewing the quarterly report and conference call right now without any deep analysis. Company continues to make steady progress. We noted some downgrades in the last few weeks. However, the numbers and posted growth seem to be fairly positive news.
Beyond the improved income statement, the balance sheet got stronger as well. Operating cash flow of $502M and reduced debt increased net cash to $5.6B or $2.35/share.
Enterprise Mobility remained a steady performer with little growth but solid 16.5% operating margins. This is not a segment of the business we are excited about but the results, orders and fundamentals are all solid and will support the value we ascribe to this division in the context of the coming corporate spin-off in 1Q2011. Expectations are for 7-9% growth; some reductions in operating expenses are going to be done as well.
Mobile Devices was profitable for the first time in over 3 years (on a non-GAAP basis.) Smarthphone shipments were 3.8M units which is up 40% sequentially. Twelve new devices were launched during the course of the quarter and position the company well for the holiday season. On the negative side, this suggests that the basic phone business is dropping off fast.
The company now expects to hit the “upper end” of their guide range of 12 to 14 million smartphone devices.
The Home division even showed some growth and improved margins both YoY and sequentially. Company will remain focused on measured enhancement of the portfolio and promoting better converged experiences. Expectations for the Home division in Q4 are for continued improvement.
In the Q&A, it’s clear that many analysts are worried about the impact of the iPhone at Verizon on the Motorola business there. With that coming in a seasonly weak Q1, and just at the time of the separation, this might create some jitters.
The relationship with Ericsson sounds like a pretty strategic move and the company is making decisions in a clear and stock-friendly fashion.
Enterprise will become a greater focus for Mobile Devices and the company will be marketing more there both directly and indirectly via their existing partners.
We continue to see the story unfold towards our IV of $11/share. The major obstacles are the impact of the iPhone at Verizon and the perception that the company will have a hard time differentiating itself enough on the Android platform.
[Disclosure: Long positions in MOT equity.]
Being pretty focused on mobile Internet, I’ve spent a good deal of time with Qualcomm and ARM Holdings but didn’t see the MIPS Technologies train leaving the station. And based on our IV analysis, it looks like we are too late. Still, the situation at MIPS is now one that we will have to watch and add to our coverage of the mobile Internet ecosystem. The positioning of the company may encourage momentum investors to pile into this one and push it further past our own IV estimates. The company reported a good quarter last night and is indicated up another 10% this morning even after the strong run that it has had. 
So what is the positioning?
MIPS has been around since the mid-1980’s when there was major debate around Complex Instruction Set Computing (CISC), with the Intel x86 architecture being the primary example, and Reduced Instruction Set Computing, which had a number of players, including ARM, which some might say eclipsed MIPS in terms of overall success.
Overall, one would have to say that the x86 approach has won out in desktop and server computing. Apple was one of the last mainstream users of RISC architecture based on the PowerPC instruction set from IBM. However, the market for processors outside of desktops, laptops and servers is massive and growing rapidly. Processors are embedded in communication gear, TVs and set-top boxes, automobiles, medical devices, appliances, etc. And there are now myriad companies making embedded processors for all of these markets.
The key is that all these chip makers need to decide on a standard instruction set so that their chips can be easily programmed and integrated into designs. The market has boiled down to four: x86, PowerPC, ARM and MIPS. Both ARM and MIPS can be viewed as “pure play” companies in the embedded market. Both follow a licensing model whereby chip makers license the designs so that they can make devices that support the architecture and instruction sets that end-market customers require.
The rise of the smartphone has raised the stakes and the interest level in this market. Up until recently, MIPS has been a fairly quiet and ignored player compared to ARM. However, the company hired a new CEO from Cavium, a networking chip supplier that has become a very hot stock (sporting a $1.3B market cap and a 12x price/sales multiple as I write this.) Cavium is a MIPS licensee so the CEO has gone in with both eyes open and a vision for the company.
Thanks to an improvement in the underlying business and some stated goals to become a major player in the smartphone market MIPS is being looked at differently.
Maybe we missed it, maybe we didn’t…
The first stop for me in looking at MIPS was to crank out a quick Intrinsic Value which came to $11.70. Thanks to the strong report last night the stock should run past that figure today. But I’ve upped it on our watch list within the mobile Internet segment of our ecosystem.
Looked at another way, though, it might be tempting as either a takeover target or a pairs trade (short ARM, long MIPS) here. For example, ARM has a market cap of just over $8B and is trading at about 16x sales. On a relative basis at least it makes MIPS look cheap with a $440M EV and a 5.6x TEV/sales ratio. So a pairs trade here makes sense. And for any player wanting to get into this market an acquisition of MIPS is pretty manageable and well under $1B at this point versus the possible $10B needed for ARM. MIPS looks less risky with more upside for an a buyer on that basis.
[Disclosure: none at the time of this writing]
[We produced this snapshot for IPO Candy last week and since it’s a post-IPO research snapshot decided to also post it here for our subscribers. That also explains the “candy style” structure of this post.]
MediaMind had a so-so IPO back in August. The shares traded up about 50% in September before settling back down recently. We had time to catch up with this one and complete our analysis and IV estimates. This one is worth a look because they have built a valuable asset in a desirable market. Management style keeps us from seeing this as a classic like the Mars bar or M&M’s but every now and again a Charleston Chew can hit the spot.
The Wrapper: MediaMind provides a technology platform for advertising agencies to manage campaigns that leverage digital and online channels. The solution improves reach by including multiple channels, improves targeting and impact and helps to measure results and optimize placements. Company is expected to report just over $80M in revenues and generate nearly $20M in EBITDA for 2010. Current market capitalization is $250M. Positioned as a neutral (non-publisher owned) platform. Company has over 7,000 advertisers, over 3,000 agencies and over 5,000 publishers in their network. 95% gross margins, 25% EBITDA margins, 348 employees, US HQ is NYC, founded in Israel with offices in many major international cities.
Recipe Story: MediaMind was founded ten years ago at the end of the great dot-com bubble. Without doing a history paper, it looks like the company was in development mode until about 4 years ago when they started to raise substantial capital, expand the board and the management team. The company changed their name from Eyeblaster on June 15th, 2010 after their IPO was filed and underway.
Yummy Ingredients:
Sour Tastes:
Candy Verdict: Charleston Chew – Adding to IPO Candy Folio
Setting aside the somewhat anti-nurture style of the management team, the company has built a very attractive business that the market appears to be undervaluing based on our IV estimate of $25.
The positioning and margins also make the company a desirable acquisition in what is a very strategic space for companies in media, advertising and technology. This factor helps to mitigate downside risk and probably provides some hard-to-quantify upside to our IV estimate.
[Disclosure: The IPO Candy Folio holds a long position in MediaMind. More information about the IPO Candy Folio can be found at http://ipocandy.com/invest]
[These are “raw” and unedited notes.]
Sanjay presented at the DB technology conference last night, and here are our notes from the webcast:
When asked about how it’s been in the last two years, he highlighted progress and reiterated that they are confident that they can be profitable in Q4 as a standalone business.
The focus is on the change in software development and the shift to “Internet style” methods. This is a big deal. Very different model. Much more work to do there. We think that means many more acquisitions.
The key markets are US, China and Latin America. Very strong brand recognition around the world. Intent to purchase is not great. It’s moving up rapidly though. [This is a key metric.]
Notes that they will “have to spend a lot of money to build the brand” which is a bit scary.
Variable data rates will start to create a mid-market for smartphones. Today it’s still all high end. Whether you pay $99 or $199 the data plans are the same and fairly expensive.
Wants to be in Europe by 2011. May make sense to do a deal there.
Motorola is a strong brand in China. Was early and strong there from the early days. Limitations on Google there make Motorola a key Android driver in China.
Lower end markets may be very accessible for Android-based phones in the near future. Probably more of a China, Latin American, South East Asia market. But still very large.
Usage model on tablets is very different than phones. Represents an incremental market. Probably a more natural evolution for a phone company like Motorola than for a computer company. See this as a threat to a computer manufacturers.
Question is how do you address the 20% of the time when the smartphone display and keypad is not enough but you still want to be able to take it with you. [If it is going to be in your pocket it will have to be projector based I guess. You can’t put a 10-12 inch screen and a keyboard in a pocket.]
Q4 there is RIM V6, Microsoft Mobile Windows 7 with $400M in marketing behind it – what’s going to happen? Notes HTC has done well with devices.
[I’d be asking some better questions than these. What about the supply chain? MOT tends to be “sold out” at the beginning of a new cycle. Why? By the time supply catches up HTC seems to leapfrog. Doesn’t seem like real leadership.]
Single component limiting supply is camera sensor modules! Interesting. Is it OVTI? Thinks that there has been somewhat limited investment in semiconductors. We need more capacity. It’s coming in the next few quarters.
If the iPhone comes to Verizon it could be an issue for Motorola volumes and profits. Nobody knows yet but it’s an issue to be aware of.
Will only deliver Android-based tablets when the experience is compelling. The hope is that is in early 2011.
How do they keep an edge over competition? Better physical design and software and services to make a better user experience. (2M motoblur users today.) Most consumer returns are over software rather than hardware.
60% of homes are HD already. More multi-room DVR equipment is being purchased. Wants to grow more outside the US. Lower cost set-tops that are more IP based is driving margins down a bit.
Might Motorola take advantage of converged devices in the home? Security? Other uses of those big screens? More powerful set top boxes with stronger processors and additional software could change the role of the “set top box” device.
You will need multi gigahertz processors to deliver performance in 2011 with dual and quad-core phones. (!)
In terms of spin off the company will have $3B+ in cash and the flexibility to do what they need to do.
Interesting question on balancing platform advance, compatibility and being able to differentiate.
12,000+ patents at Motorola Mobility is clearly an asset. Means they will generally pay lower royalties and also gives them more freedom.
The marketplace experience has to get a lot better. Unified marketplace may be coming. There are at least a dozen pieces of low-hanging fruit there.
Wants to create a media solution around the home but not clear where they are in terms of delivering it. There could be an ecosystems around the set-top box space as there is around mobile. Interesting idea. No idea where that’s going.
[Disclosure: Motorola shares are part of the R2 model portfolio and the author also has a long position in the stock at the time of this writing.]
We’ve been following the Motorola situation for some time now and you can’t say that Icahn doesn’t put his money where his mouth is. It was only a little over a month ago that we wrote about the Motorola Investment Thesis but Carl keeps popping up in the news on MOT.
Recently he’s been adding to his already very large stake in Motorola with purchases of over 3 million more shares last week at around 7 1/2. He now owns over 250 million shares.
Icahn is an insider so he clearly has more information about near-term business conditions as well as more details than we do about the company split which is now only a few months away.
We think that nearly any analysis suggests that MOT shares are undervalued. The market and the stock action though would seem to disagree. Most that have expressed their view have pointed to dreadful record that senior management has and the likelihood that they will continue to be destroyers of shareholder value.
Icahn represents an interesting counterpoint to this view precisely because he shares this point of view. That’s the very reason he has gone after MOT with a major campaign to reform it and made a huge investment. His level of disgust with the past several years of underperformance is probably at least equal to the most vehement critics that we have heard railing against any investment in the company.
So far few in the market share his optimism. If his open market purchases of stock have done little to move the price higher imagine were the stock would be today without it? It doesn’t look like many are joining him in his conviction that the shares will be worth much more in the future.
Another downside of Icahn purchasing stock recently is that it indicates that the company is not any material discussions about selling all or a major part of the company that we don’t already know about. (That would be material non-public information that would mean any insiders would not be able to transact in the shares.)
Although published early this year our strategic review and positioning analysis of the Motorola businesses is still useful in the context of preparing to value the post-split company. See the report via this link: R2-Motorola-Positioning-Document-0124010.pdf.
Recent Comments
This week Greg Brown presented some updates about the post-Split Motorola. First of all the capital structure will be more efficient. While some restructuring amounts to “rearranging the deck chairs on the Titanic” this one will cause some immediate benefits. First of all health of the “cash cow” enterprise business will improve right away since their borrowing costs will decline and cash flow from operations can be earmarked for stockholder returns in that business rather than funding the losses in the mobile segment. (See below on that.)
Brown did go on to note that so far this year the fortunes of MOT have improved substantially as shown in this table. ?
Motorola Solutions is the main driver at this point and on separation will be a stable company with upper single digit growth, high operating margins, and possibly even a dividend.
The Evolving Android Business
In terms of new developments we did note the recent purchase of 280 North with some interest. The software development side of the Android business is what it’s all about in our view. (We have no intent on following the “old” Motorola cash cow business post-spinoff.)
It’s become clear inside Motorola that one outstanding mobile software developer in Silicon Valley is worth about 100 corporate developers in the mid-west. So this move represents a trend towards a more modern, plugged-in and design-oriented software development team in the Motorola Android business.
Beyond the people 280 North also brings elements of a development platform that is increasingly important and differentiated between different Android-based handset makers.
We expect this trend to continue and accelerate from here given that the Motorola Mobility business will be spun-off with $3.5B in cash to use to finance operations and make further technology acquisitions.
Importantly by the time the spinoff occurs the Mobility business should be running at or close to break-even, maybe even showing a little profit. Investors may be reluctant to put a high value on that hyper-competitive business but the stakes there are high enough to suggest a bet there is well-placed.
What still bothers us?
The main concern is execution on the mobile Internet side of the business. So far it as been good but not amazing. We’d like to believe that this is due in part to the legacy of the old “Motorola way” and something that will improve. But the temp of innovation, customer support and integration with the home networking and entertainment business has to occur with greater speed and consistency of quality. Things have been a little slow and patchy in places. For example why let HTC or Samsung have leading devices in the field for weeks or months? Things are going to move faster in 2011.
[Disclosure: The R2 Model Portfolio has a long position in MOT and so does the author at the time of this writing. Positions are subject to change anytime and without notice. This post should not be considered investment advice.]