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Thanks for the opportunities…

Posted on August 12, 2008
Filed Under Research | Leave a Comment

The NYT noted in a recent article some comments by Frank Quattrone highlighting some of the dysfunction visited on the Wall Street research world several years ago. 

It does a good job of highlighting one reason that Research 2.0 and the Creative Destruction Fund are such a good fit in the current environment.  Investors want and need high quality independent research that focuses on emerging technology trends, disruption and company investment opportunities.  It’s not likely to come from any major Wall Street firms anytime soon.

Maybe the dramatic public unraveling of the Spitzer persona will help others see the folly of some of the most extreme reforms visited on Wall Street research.  It wouldn’t be hard to extend the enforcement of skills, standards and certification on publishing Wall Street research analysts and ensure their independence and integrity.   No good analyst would resist it and the best ones would welcome it.

Steve Jobs and Michael Dell Interview Transcript

Posted on July 31, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

Steve Jobs and Michael Dell recently met informally over lunch to have a chat without handlers, press or investment bankers. Dell reached out to Jobs with the idea of the meeting and Steve graciously accepted the invitation. Michael and Steve felt a kinship in that both were founders and pioneers in the technology business who returned to run their respective companies during times of turmoil.

As good fortune would have it, we were sitting at a table nearby and were able to create a rough transcript of their conversation, unbeknownst to either of them. Here’s what we heard.

MD: Hi Steve. Congratulations on all your recent success. Thanks for taking the time to meet and talk.

SJ: My pleasure, Michael. I was happy to see that you stepped back into running Dell. Your replacement was making a real mess of it there.

MD: Yeah, it was a difficult decision since I handpicked my successor, but my name is on the box, after all. There is no question many mistakes were made after my departure as CEO. However, we still have a healthy core business that people don’t really give us credit for and I’ve still got a great deal of energy and experience to bring to the company to get it back to prominence in the industry. I see you’ve done an exemplary job of creating a media halo for Apple since your return.

SJ: Halo?! I wouldn’t call it that! They jumped on us for using DRM in iTunes, for “stealing” the iPhone name from Cisco, for using AT&T as our carrier and for reducing prices too quickly. It’s murder out there!

MD: Come on, Steve, it’s just us here!

SJ (grins): Well okay, so people are in love with Apple again. Who can blame them? Have you tried our machines? (grins some more)

MD: I only use computers that I build myself. That’s how I got here.

SJ: Well then, why are we having lunch?

MD: Steve there’s no question Apple is on a roll. But there’s much more to do and Apple isn’t well positioned everywhere. I’m thinking we might be able to help each other.

SJ: If you’re talking about taking over our hardware business like those geniuses at Gartner Group suggested in 2006 you are out of your mind. And don’t take it the wrong way but I don’t think our stockholders would be enthusiastic about a closer association with Dell.

MD: Steve, I’m talking about much bigger things than making boxes; that’s done. We are at the beginning of a huge investment cycle that will be the result of the shift to cloud computing but also the convergence of the real and virtual world. More Apple stores will be visited by real people in virtual space rather than on 59th Street.

SJ: What do you think the iPhone is about? It will revolutionize how we live, work and play. At least a million people see this already but more don’t yet realize it. The operating system, interface and the massive application base that will emerge will change the way we interact with the online world in our daily life. We’re just scratching the surface with our technology. We’ve got a lot of great ideas and patents in the pipeline. Ten years ago the Blackberry was a specialized niche product. Now many people spend more time with their Blackberry than their computer. We’re going to pass RIM like they are standing still. It’s the key wedge that will separate enterprise users from Microsoft. Once that happens, it’s a free-for-all and we win big.

MD: That’s exactly on the path of where we are going. Apple is a strong position in the mobile and client space. But the heavy lifting is set to go on by the servers, storage and networks that enable very powerful cloud-based services. More real interaction is shifting to virtual worlds. The compute power and software required for this is an immense business opportunity.

SJ: We sell servers and online services! And we understand how to deliver technology and entertainment services like iTunes, AppleTV and MobileMe. Anyway, isn’t Google going to handle all that? Why would I want to compete with them?

MD: You may not have a choice Steve. You’re going to find your market limited if you allow them to own cloud-based technology services. Besides they clearly have their own vision of the mobile internet and are trying to drive Android into the picture. Not to mention the fact that after years of effort you’re still struggling with MobileMe.

SJ: My staff gives me briefings on all this stuff every day. At least you didn’t bring up Adobe; those guys bug me. We’re doing extremely well, the iPhone is a Trojan horse and we have a great pipeline of new products. What exactly are you talking about doing? (a little exasperated)

MD: It’s still early days in these markets Steve. Although the spotlight today is on the consumer space, the wave of enterprise adoption is going to be huge. Google still has a small footprint in the enterprise. We are big there in both systems and storage. You are largely absent from the high end gaming market but Dell is there. While Microsoft, Sony and Nintendo fight for the consumer market in gaming we can own the next generation of interfaces, interactivity and applications in the enterprise.

SJ: We’re making progress in the enterprise. Some very large companies are starting to roll out the iPhone now. That’s the first domino to fall and then we can infiltrate the base.

MD: Surely but too slowly. Industry data suggests that an amazing 25% of enterprises want to incorporate Apple hardware but only 8% have plans to do so. That’s a lot to leave on the table.

SJ: But we will be getting them faster than they think. Those numbers keep moving up. Of course, we’d love to have the full 25% that want to have Apple be able to do it. What’s stopping them?

MD: These guys aren’t buying computers to organize their music libraries and photo albums. (smiles)

SJ: Very funny. We make very powerful systems and do have large enterprises running on our infrastructure. Many of the creative industries have long had us as their standard.

MD: Steve, that’s true but I’m talking about companies like Federal Express, Citibank, GE and the rest of the global 5000. Many are installing the most advanced computing infrastructure in the world. But they need suppliers who fit with their business practices and operating model; delivery, support, escalation procedures, interoperability, management and a raft of things that require a focused approach. It’s something that we know well and rank near the top of the field.

SJ: Yeah okay so we can be more corporate. We know that. It’s not like we aren’t moving in that direction. We prefer to do it with radical new offerings like than iPhone rather than playing golf with executives.

MD: These days your golf game doesn’t really enter into it. Many of the big deals in the space are even done via auction. It’s a tough business but we know how to do it as well if not better than most of the players. In addition we’ve been investing heavily in technology that can run the modern interfaces and applications that you see in games today but will increasingly be a common feature in the enterprise. At the same time we are expanding into the SaaS and social computing space in the IT space.

SJ: I appreciate your prowess in some of these related areas but it doesn’t translate into why we should be working together. We have been working on quite a bit of this ourselves and you know there are other companies out there like IBM and Hewlett Packard that you may have heard of. (smiles)

MD: We overlap in some key areas, more so than we did in 2006 now that Apple is on Intel. We also complement each other very well. There’s a Yin and Yang here that could make up a potent whole.

SJ: I’m not Yin, and sure as hell no Yang. I hate all that corporate enterprise crap. Reminds me of guys like John Sculley. (winces, then drinks some water as if to wash a bad taste out of his mouth)

MD: Dell could help integrate Apple into the next-generation of enterprise infrastructure. It’s going to be a big wave of investment that will embrace not just service-based or cloud computing but also virtual reality. It’s going to have a dramatic effect on business. As partners we could do way more, much faster than companies like HP, IBM or Cisco even though they have a lead in some areas.

SJ: Yeah, I’m still listening.

MD: We’d have to work out the details, but my idea is to become the enterprise arm of your business. We would work closely with companies who want to incorporate Apple to provide the pieces they need. We’d also incorporate Apple technologies into our high-performance and corporate cloud computing solutions. And we would both work together to pioneer virtual stores in places like Second Life.

SJ: Okay so tell me Michael, what’s in it for Dell? And why do you think Apple should be interested?

MD: First of all we’d be selling your great computers. (smiles slightly sardonically) But seriously it would serve to further differentiate us from traditional enterprise vendors like HP, IBM or Sun. Secondly it gives us a way to participate more in the mobile internet space which is where most of the growth on the client side is going to be. I can certainly see the disruptive power of the iPhone and how it could well eclipse other offerings, but to do so it will need to do well in the back office of large companies, not just in the hands of a user. Lastly I think we are both leaders in what we do best but are facing some serious competition from the old guard. Together we can shake things up and bring them down more quickly.

SJ: Interesting. Go on.

MD: And it’s no secret that virtualization is now an enterprise strategy. Apple is now on Intel chips which means that the Windows OS and other components can run easily on any Apple HW. Of course I’d also like to get Apple SW components integrated on Dell HW. Doing so would mean a much bigger opportunity for Apple SW inside the cloud.

SJ: Alright, alright I can see that we may have something here.

MD: We can let Sony, Microsoft and Nintendo have the game console in the home but we can’t leave the business market to them. As more activity moves online into virtual worlds we need to be there to capitalize. The servers, storage, services and software should all be Apple/Dell.

SJ: You’ve got our names in the right order there. (smiles) We actually have some work and patents in the immersive virtual space around shopping that we picked up years ago. But until now there hasn’t been much of a market. We launched AppleTV because at least the video market is real.

MD: These things grow slowly for a long time and then all of a sudden they’re huge. We’re seeing real movement now and there are signs of what the future world is going to be. Look at the amazing success of devices like the Wii, the growth of social computing and online communities. These elements are coming together now. IBM and Cisco are already very active and investing here.

SJ: It would be a shame to let a big opportunity like this slide by.

MD: Let’s consolidate our individual strengths into a powerhouse. Apple is the only player who has major positions and assets in software, the mobile internet and online entertainment. Dell brings the enterprise-class capability along with scale, storage solutions, online services and immersive computing. We can exploit the movement to virtualization and the cloud to marginalize the impact of competitors like Microsoft, Research in Motion, Hewlett Packard and IBM. Maybe we will also be able to keep the great Google at bay.

SJ: For a guy who still knows how to use a soldering iron you have some good ideas. (smiles)

MD: We’ve both come a long way Steve. We’ve also both got much farther to go. (smiles back)

[This interview is purely fictional and has been produced purely for entertainment purposes. Any resemblence to an actual conversation between Steve Jobs and Michael Dell in the past or the future is purely coincidental.]

“CEOs I know” dropping like flies…

Posted on July 28, 2008
Filed Under Companies, Markets & Finance, Starting Up | Leave a Comment

Outside of the dry statistics concerning the ongoing consolidation in the software market is our own readership and contact network.   Research 2.0 has always focused on the position and influence of clients and readers rather than sheer numbers.  The number of CEO research clients has been an important aspect to our business model.

We always loose some CEO clients to acquisition but lately the pace seems to have quickened and moved to smaller companies as well.  At first we lost Alfred Chuang as BEA got absorbed into Oracle and then Bernard Liautaud as Business Objects became part of SAP. 

Then today we saw ILOG get acquired by IBM after years of innovative management by Pierre Haren.  Just a week or two ago Datallegro was acquired by Microsoft and Stuart Frost dropped from our CEO list as well.

Fortunately we have picked up some new CEO reader/clients and our numbers around the number of technology CEO and institutional PM readers that we have direct input to has never been higher either in terms of numbers or market capitalization.

Still the velocity of change seems to be ever increasing and it further influences are thinking on approach and business model.   We also know that many of our prior-CEO friends will again be at the helm of even more interesting start-up companies.

One in the SaaS/Data space is Good Data which has just raised a significant round of financing and his entering very early stages of technology demonstration.  The company is led by CEO Roman Stanek who successfully piloted prior startups like NetBeans and Systinet.

As always the ratio of "what’s new and interesting" versus "what’s old and boring" is increasing every day at Research 2.0.  We all need to get used to shorter cycles.

Data Domain Comes Through

Posted on July 25, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

We highlighted Data Domain (DDUP) in a prior post a bit over a week ago as being exceptionally timely given the excellent data we were getting through our research sources and the market-driven pull-back in the stock to levels that provides some meaningful upside to our $24 IV estimate.

The stock has held up well during this time and into the earnings last night which reflected strong execution and allowed the company to raise guidance for the year.  The company continues to post powerful growth of over 100%.

We reminded our clients in a recent research report that data de-duplication is the top spending category in enterprise storage but the shares were too expensive at the time to get excited about.

Our IV model has been tweaked a bit post the quarter but doesn’t change our IV number much. We think that our $24 could go up by a couple of dollars but if the stock rallies post quarter we would probably take some profit.

Anywhere below $21 we’d probably get aggressive again assuming our research inputs remain intact.

Tags: Data Domain, DDUP

Is eBay next?

Posted on July 23, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

With the Yahoo festival seemingly winding down or at least bringing us all to the point of fatigue we have started to wonder if eBay is next.

The stock has been a disaster these last five years with the shares down 20% during the period and off over 50% from their highs of $58 back at the end of 2004.

We all know that management has done little to organize the company for success. Acquisitions have helped the company but not enough to boost the stock.  It’s possible that some of them are just about ready to help overcome what seems to be a fairly rotten core business in terms of growth. 

The situation seems ripe for the antics of the slippery slimy types to come in under the auspices of creating shareholder value.  This one seeks too tempting below $30 to be left alone.

Tags: ebay

DIG/DUG and all that oil jazz.

Posted on July 20, 2008
Filed Under Companies, Markets & Finance, Energy | Leave a Comment

There is an increasing number of discussions and recommendations about being short or long oil.  A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction.  At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.

To be up-front we are long DUG which is a leveraged short on a number of oil and gas related stocks.  A fair number of people have come out and questioned this as an "investment."   In the short-term of course it is not.  Nobody can be right in the short-term without inside information or luck.  (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.)  But if one is looking out a few years and running a diversified portfolio vehicles like DUG and others can come in very handy.

First of all they are a hedge.  If you don’t have something to hedge against falling oil prices then don’t pretend this is a reason to be involved.  We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure.  These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.

However if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on.  By being short "old" energy and long "new" energy we can insulate a bit during short-term swings.

Long-term we do think that being short oil here is an investment.  There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different.  It’s beyond the scope of a blog post but those interested should certainly pick a copy of The Ultimate Resource by Julian Simon.     We also don’t yet publish much of our energy work to individuals but for now can highly recommend the work that Tom Konrad the team  does over at altenergystocks.com.

Tags: Energy, DUG, DIG, USO, OIL

Data Domain (DDUP) reaches buy point.

Posted on July 16, 2008
Filed Under Companies, Markets & Finance | 1 Comment

We’ve been following Data Domain for over a year and it has tended to be too expensive to buy.  Our intrinsic value (IV) estimate has been fairly consistent at $24/share but recent inputs suggest the company may be able to do well enough for us to tweak our model higher and see an IV in the upper-$20’s.

The recent market turmoil has reduced the price to just over $20 which makes this a strong candidate for boosting overall 2008 returns. The shares could easily finish the year up 20% from here.

Our inputs underscore the competitive lead that Data Domain enjoys in the marketplace.  The major competitors like EMC are still over a year behind.  In addition it has proven out to be much more difficult to switch deduplication vendors than most people originally thought, enhancing lock-in.

We published an updated report entitled "Data Domain One Year Later ($)" with more information and to serve as a follow-up from our initial report published when they did their IPO in 2007.  Subscribers received the report in June when DDUP was trading higher meaning there wasn’t a strong stock call at the time.

However at current prices our clients should be more aggressive. The report is also available for purchase at the link above for those wanting more details.

Google investors still get hung up on culture and strangeness.

Posted on July 9, 2008
Filed Under Companies, Markets & Finance, Software, Technology & The Web | Leave a Comment

Institutional investors are mostly not tuned into the Google zeitgeist even though they own major positions.  As possibly the most over-followed company on the planet Google investors will hear about every little ripple of information.

The weirdness stems from the Google culture where engineers can spend time doing pet projects and see the show up as offerings in Google Labs or even as "beta" products in the Google portfolio.

When Google comes out with something like Lively it gets looked at and generates not only puzzled looks but some concerned questions of whether Google has "lost its way."  The fact is that Google throws quiet a bit at the wall to see if it sticks.  Plenty doesn’t make the cut but none (or very very few) are like Microsoft Vista or Adobe Creative Suite.  For Google and other SaaS styled companies it’s not about product cycles.  New products, particularly strategic ones do have a role to play and bear watching closely.

The problem is that many mainstream investors have a hard time sorting out the important aspects of what’s going on at Google from the unimportant ones.  Offsetting the difficulty in separating the wheat from the chaff is a blissfully short memory that generally means any Google weak launches or eventual failures are forgotten quickly.

Google remains an essential portfolio holding as they are perhaps the best technology architecture for modern computing although they occasionally put out some stinkers.  (Requires Windows XP and Internet Explorer?!)

Developing a good feel for Google as an investment requires an ability to make more "doesn’t matter" decisions than we have seen with any technology company in the past.

Enterprise pull for Apple.

Posted on July 7, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

Apple will continue to benefit from having a relatively small base in the enterprise.  Two new surveys out that are credible point to fairly high pent up demand for both Mac computers and the iPhone in corporate settings.  Goldman Sachs was out with one showing 17% of companies plan to support the iPhone on their networks in the next year.

Another out of upstart ChangeWave suggested that while only about 8% of businesses were deploying Apple computers today, over 20% of them desire them. 

These numbers support continued market share gains and above average growth and profitability for Apple. Apple is a long-term core position for us so this serves merely to support current conviction levels on the name.  Fair value estimate remains at $250/share.

Tags: Apple, Mac, iPhone

So much for “decoupling.”

Posted on July 3, 2008
Filed Under Companies, Markets & Finance | Leave a Comment

Somehow those economist and strategist types talking about decoupling a few months ago failed to notice one little thing, every country uses energy and food.  So even as regional economies develop their own production and consumption ecosystems we will still be tied very closely together thanks to the things we share. 

This is another reason we work hard to make sure we provide some researched short ideas for our clients.  Our mobile Internet picks are all down of late (Google, Apple, Research in Motion) but our shorts (Iron Mountain, Symantec, Constant Contact, Juniper, Seagate) cushion the blow.

We will never be able to predict stock performance by the month or quarter but going out a year or two has worked well in this market.  Our longs are gaining share and have great business models thanks to the industry trends we are seeing.  The market remains uninspiring on the long side of things but we’d encourage long-term investors to own the mobile Internet group without hesitation.  (We published a short 2-page note($) on this along with price targets and an ecosystem of names on June 5th.)

Tags: Apple, RIM, Google, Mobile Internet