Low rates + stagnant markets = growth via acquisition?

Sometimes its useful to step back and look at the overall picture.

Despite the recent slowdown in the economy, many companies in the tech space are flirting with margins just off their record highs. Cash positions are strong. The credit markets are certainly tight but most of that centers around real estate concerns. The consumer is in retreat. Growth is going to be hard to come by in this scenario.

The stock market has corrected pretty substantially, particularly in tech -- the semiconductor index has retreated from 550 to 375 (32%) over the last 6 months. Valuations are obviously significantly lower.

Federal Reserve policy the last few years has been to flood the system to fix problems and doesn't seem to account for the subversion of the environment they create. When Y2K looked like a threat, they flooded the system with liquidity and created a bubble in speculative stocks. When the market failed to recover and the economy was clearly going to be in trouble in the aftermath of the reality that profits would never justify the valuations, they lowered rates again to avert an economic collapse. In doing so, the fed inadvertently created a real estate bubble as cheap money always finds a vehicle. Now that's backfiring.

Now the fed has lowered rates an unprecedented 125 bps in the last 2 weeks. It's likely they'll ease the real estate market woes. It's also likely they'll inadvertently create yet another financing boom. Banks can now borrow at the window with impunity and money is cheap. They need to offset this real estate crap somehow. I would think they're going to feed the corporate merger beast next.

Larger corporations have their pick of smaller acquisitions to make here. They're not going to grow organically, its a retrench period; they will consolidate positions in existing markets and find new growth drivers. Acquisitions are probably the only real growth driver here... and a more appropriate action than waiting for the economy to improve.

Money always finds a way to get spent.

A bigger buncha Yahoos

Semel left. That's obviously an admission that his position was indefensible.

The company is talking about getting out of music. It wasn't working particularly well anyway.

The private equity plan (if there was one) would have to be spin off the media assets to a larger entity (NBC Universal has been floated as a possible buyer) and outsourcing of the search business to Google (which would be great for margins but lousy for revenues). Alibaba and Yahoo Japan already have "exit" paths as they're publicly traded vehicles.

The media is dismissive of another large media buyer as most of them have their hands full and Yahoo is a whole mess of distraction for most of them.

The net of it is that Google is the big winner in almost any scenario here. If the deal takes forever (which it will), they look like a safe port in the storm. If the private equity scenario goes through, that's all win for them. If the deal doesn't happen, Yahoo and Microsoft will have been dissected to the point that it will be clear Google is the better choice.

Blodget is all over this and thinks Microsoft takes Yahoo uncontested and that the deal will be a disaster over time. His blog on this subject is extensive and covers all the bases.

Hynix cuts capex

DRAM capex cut by 43% yoy for 2008E — Compared to its previous guidance
of a disappointing capex cut of W4trn for 2008, Hynix has further lowered its
guidance by 10% to W3.6trn (US$3.87bn, down 25% yoy). More importantly,
DRAM capex is estimated to fall 40% yoy to W2.3trn (US$2.48bn) from 2007’s
W3.84trn (US$4.13bn).

Cry me a Digital River

The bar comes down pretty good for next year with company guiding expectations from $2.20 to $1.88 in EPS for 2008.

I like this stock under $31 very much. I think they get acquired. Digital software distribution is going to be a huge business for a very long time. Amazon should buy them next. The Amazon is a river too. It's perfect.

Google a little light

It's such a marginal miss and the stock is down 200 points from its peak and not a very expensive stock. They're still taking share.

The alarming part of their report was the drop in click through on their ads. They cited a drop-off of some 9% from the prior quarter. Are consumers so beleaguered that they don't even have the desire to click on ads? Or as time has gone on are people learning how not to click on them by mistake? Are they tuning them out like white noise?
Their comments about social networking being a disappointment are ominous. They paid an awful lot of money to advertise on myspace and now they're saying it's not what they'd hoped. These are ongoing payments. They're locked into this deal for years to come. It suggests that TAC (traffic acquisition cost) as a percentage of revenues will continue to rise disproportionately unless they can figure out how to better monetize that traffic.

That said, the stock is growing at twice the P/E and there's no better game in town at present. The Yahoo integration uncertainty is going to create a good near-term environment for them.

Sometimes I worry about Google throwing money around at too many different businesses... flailing around, trying to find the next big growth avenue. Myspace could be a fluke mishap. Youtube isn't very monetized either. Suddenly it seems like more than coincidence.

They're scanning every book ever printed, they're bidding for wireless spectrum, they're going into cell phones... these seem like disparate pursuits. I'm not entirely sure they know where they're going next. I think on some level its spaghetti investing -- throwing a little of everything at the wall to see what sticks. That's typically an indicator of failure, not success, over time. It causes distraction, dilutes focus, fosters chaos.

Pleasurable work environment is a big selling point for Google's employees. They're pampered to no end with restaurants, an on site spa, laundry services, a campus car wash... the list goes on. Google has a mantra that everyone at the company should spend 20% of their time pursuing a personal project, hoping to bubble ingenuity to the surface from their employee's passion. That sounds great but it also sounds hard to moderate. You want your employees to be motivated and not stuck in a rut but you also need clear leadership and an understandable, achievable target. I'm not sure they know what their target is right now.

In my opinion, it's figuring out how to better monetize social networking. Fast.

The company is growing at 50% y/y, which is deceleration. Estimates next year are for $26 in EPS. So at $516, the last sale, that's under 20 * EPS for a company growing over 50%. Tough sale there. You've got to think the company's growth rate is going to plateau and that the earnings numbers are too high. I think it's soon to make that conclusion.

First takeover bid for Yahoo

Microsoft bids $31 a share for Yahoo. In months past, they were a rumored suitor... at much higher prices. Semel also stepped down from the board. I doubt Yahoo goes to the first bid. It's a valuable media property with a stagnant market share. There have to be other parties interested in it.

Though fundamentals stink, the stock is going to have a bid underneath and I would be shocked if investors don't speculate about other suitors or even a sweeter Microsoft bid.

TSM Q4:2007 Results

So Taiwan Semi reported. They're important because they're the largest foundry -- they manufacture more semis than almost anyone else.

TSM thinks the market next year will grow in the mid-single digits, which is a downtick from an earlier estimate of mid-single to high-single. Putting their money where their mouth is, they cut capex to $1.8 billion for 2008. Previously they haven't had a capex estimate out there for 2008. I spent some time with management 3 months ago and they said capex is a fluid process -- so the fluid is clearly flowing the wrong way.

Once again, negative for the semi capex suppliers.

MTSN Q4:2007 Results

Mattson announced better Q4 EPS due to an unanticipated royalty payment from DNS and a tax gain. Ex those items, their operating margin was negative. Revenue guidance was significantly below the street at 42-48 mil versus consensus expectations of 57 mil -- a whopping 25% disappointment. Bookings came in well below estimates for the current quarter and apparently visibility has careened off a cliff as the company has decided not to provide bookings guidance going forward.

Mattson's semiconductor capital equipment business sports 70% exposure into the memory capex market at present. Memory has had an unprecedented wave of capex upgrades over the last few years. It's set up for a really steep decline. I continue to advocate avoiding other companies with large exposure to the memory capex market like VSEA, LRCX, KLAC. It's going to be a house of pain for quite a while.

Amazon Q4:2007 Results

Amazon is perhaps the single greatest commerce service born of the internet age. No other site has taken such utter control of my discretionary spending dollars. I was the kind of kid that would wander through Sam Goody if I had a half hour to kill, perusing the racks. I don't think I've even been in a record store since 1999. Over time, they've taken my book dollars, my CD dollars, my DVD dollars and lately my consumer electronics dollars. And yet they just don't seem to be all that profitable. Consumers walk up and pour huge dollars into their top line and all their costs chew the dollars into teeny tiny pennies.

Frankly, I'm surprised they don't charge more for the service than they do. I trust them, they do me right, it's sooo convenient. They should charge a premium -- they're making my life easier.

That said, Amazon was easily the most expensive big cap "internet" company. I've always thought it was a mistake to compare them to anything but the retailers they compete with. When you compare them to a retailer, that valuation disparity becomes even more glaring. The stock is relatively expensive on almost any metric to its peers and its growth rates.

Amazon announced this morning they're buying Audible for $11.50 a share in cash. Yeah, I suppose it was going to be them or Apple. Amazon's bread and butter is books and music and they really need to get caught up on digital distribution -- they're going to lose market share in packaged products as the secular trend of instant gratification downloading continues. Digital distribution is the growth area for internet vendors now. Look for Digital River to be acquired for its digital software delivery expertise at some point, too.

Synaptics insider buys

Keith Geeslin, a director of Synaptics and a partner in private equity fund Francisco Partners, bought 20,000 shares in the open market under $24.

When an insider exercises and sells shares, I understand. When they make outright sales of long-term holdings, I'm never sure how to take it -- those can be lifestyle motivated sales. I think outright insider purchases are the most revealing of all transactions, though. Insiders buy stock outright for no other reason than they think the stock is going up.

I still like this stock down here. I think it should be trading north of $30, not here in the mid 20s. And Keith likes it too, so there.