Posted on September 28, 2008
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Despite the advice of market pundits to spend this weekend relaxing we’ve been working on an update on open source software adoption. At the same time we have been back at the links after a multi-year hiatus. We started to think about why we got back into golf after the gap and the answer illustrates what I think is a fundamental structural shift that could help revive the sport.
Golf is a special sport for many reasons but athletically it is one of the few if not the only one when the implement that is used to hit the ball doesn’t stay constant as does a tennis racquet or baseball bat. A golfer may have to use 14 different clubs to get the job done. For all the attraction about the same number of people quit playing golf each year as take the sport up. It’s stagnant.
We know that clubs like Winged Foot are not going to change and we wouldn’t want them to. Playing there is a religious experience that shouldn’t be tampered with. However the notion of suspending our other obligations and connectivity for a half a day is getting harder and harder to do.
This summer we stumbled into a new model that was an epiphany for us. We stopped thinking about playing a full round of 18 holes. Our goal was always to squeeze in 9 and not even feel that we needed to commit to that if we were pressed for time. So all of a sudden we were playing three or four times a week but for much shorter duration. We could begin to incorporate golf into the normal, busy life tempo that most people have.
We have seen some "executive courses" with only short par-3 holes but many of them are more driven by space constraints rather than good ideas about changing how people relate to the club and the game.
Playing 9 is a great start but maybe more forward-thinking courses need to start thinking in 3’s instead of 9’s. Why not lay things out based on 6 out and in at least? That would make playing 6, 12, or 18 all easy to do. Six holes gets the round into the sub-90 minute range of a typical movie, tennis match or bike ride.
The shorter options would also open up better pricing without having to spend $100 on a full round it becomes easy to pay $20-$25 for 6. They economics could be better than expected because golfers would certainly make more visits to the course and I suspect would actually spend more time there.
In short by reengineering their approach to allow the sport to be integrated more easily into the typical lifestyle, golf could start to grow again.
Tags: golf, business, economics
Posted on September 25, 2008
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As a research firm we may select conferences a bit differently than those who go for "networking" reasons. We went to quite a few conferences three or four years ago and they served us quite well as a firehose of information and new contacts to replace what had been lost after a few years in "management" on Wall Street.
Besides being back up to speed a few things have also changed since then. First of all online information and social networking has evolved very quickly. So often access to the presentation and related material is available during or immediately after the event. Somewhat perversely the presentation content that companies bring to investment conferences is often available online *before* conference attendees can see it. For example there is a UBS conference today and a number of companies scheduled to present filed their content with the SEC early this morning so we’ve already had a chance to review it all by 7:30 a.m. but I digress.
They key to conferences these days is getting to them at a point where they have a critical mass of content and attendees but before they go super commercial as many do. They also obviously have different content focuses today so it’s more possible to attend shorter, more narrowly defined events. For example we just attended a two-day workshop on open source software in Europe that was worth the time and very complete. By doing it we are able to very effectively get our arms around all that we need to know for the next six to twelve months.
Our next event is the Web 2.0 Expo in Berlin on October 21-23 which is very focused on more practical content around emerging web technologies. As we prepare for broader enterprise adoption in the coming few years we think this is an important area to focus on. It is after all the commercial absorption of these technologies that will define some of our best investment results in the next five years which is what matters most to us and our clients.
The hands-on focus of many of the talks will be injecting a healthy dose of reality regarding many of our key research areas including cloud computing, social networks, mobile Internet, online collaboration, and analytics to name a few. We also expect to get some new insights on some public companies in our ecosystem like Adobe, Google and Nokia.
For anyone that wants to enjoy a 35% discount for the event please use our discount code: webeu08gr63 and let us know if you are coming.
Tags: web2expoEU, web2expoEU08, w2e_europe08, eurotech, ADBE, GOOG, NOK
Posted on September 21, 2008
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We’re preparing for a productive Web 2.0 conference in Berlin October 21-23. Recently Tim O’Reilly was shaken up so much by being in such close proximity to the fires of the financial meltdown at the NYC Web 2.0 Expo that he had to rewrite his whole speech to refocus on doing things that "matter" (instead of mashups that show the correlation between crime in Chicago and milkshake flavor choices at an In-N-Out burger in LA.)
In October we should be able to focus a bit more on technologies and start-ups, particularly more from Europe. We see Europe as a much more fertile ground for startups for a number of reasons. While Europe lacks some of the features of Silicon Valley it has some different elements that can be just as effective. There’s no shortage of talent and technology expertise which makes it a hotbed of activity. Additionally many large companies still prefer to use and even champion local technology to help small firms get a business foothold and critical real-world feedback.
We’re also starting to see increasing VC activity in Europe as leading firms like Union Square Ventures have shifted more of their focus to Europe and even started to make some investments. Zemanta being a good recent example and it’s even based in Solvenia. It’s been a long time coming but we see a sustained upswing of activity here because the environment is becoming more "target rich" every day and the expectations and level of VC competition is less heady than what one finds today in the Valley and even now in Boston and NYC.
In addition to being at the event we’ll be actively covering the more interesting pieces here and hosting a small group dinner on the nights of the 21st and 22nd. If you haven’t been to Berlin it’s a great place to be. We also have a code (webeu08gr63) which gets 35% off the registration. We’ve distributed to our clients but the conference organizers said we could also post it here.
Tags: web2expoEU, web2expoEU08, w2e_europe08, eurotech
Posted on September 17, 2008
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We’re reminded a little of the admonishment "be careful what you wish for" in this current market. The financial turmoil, unwinding of high energy and commodity prices and slowdown in global growth are all here as expected. Why don’t we feel more happy about it?
Obviously a market this bad drags everything down but it also calls into question fundamentals and estimates. It’s been pointed out by others like Bill Hambrecht recently in an interview that growth rates will slow but balance sheets are in very good shape. Think of the cash that leading companies like Apple and Google are swimming in.
But still we know that things "at the margin" often determine direction and sentiment for stocks and it’s clear that lower financial sector IT spending and more careful consumer spending are going to reduce the take up of technology, particularly things that can just wait a while. Our friends over at MGI put up a post that points out that while about 20% of technology spending comes from the financial sector but even more, close to 30% of "leading edge, advanced technology" comes from there. To us it means that maybe the expensive uptake of new technology products will just be a bit slower than it was going to be.
Cautious consumers and slowing global growth will certainly push purchases to lower price points and elongate new product cycles (Adobe releases CS4 next week and no matter how good it is most will probably not be eager to move from CS3 anytime soon.) No doubt $400 smart phones and $2000 laptops may give way to $150 and $1200 versions respectively. In many respects the timing of the small and cheap laptop PC will be perfect for this economic backdrop.
Current valuations seem low but of course the key question is how much of the slow down is "in the numbers" right now? We did a quick and dirty analysis looking at forecasts for the top 100 technology companies by revenue to see where we are right now.
The Top 100 have revenues of just over $1T with a total EBITDA of about $200B. Based on current estimates revenues are expected to grow 8.2% this year and 8.7% next year. These numbers are probably close to but could come down a point or so. Earnings per share growth expectations do look too high though with growth of 24% this year and 18% next. It feels like the 24% number should be cut in half and the out year would be fine from these lower levels. Athough we don’t have EBITDA estimates for all 100 companies the ones we do have show growth of 14% this year and 12% next.
Our conclusion is that there are still some negative changes at the margin that may keep valuations and sentiment in check for the near term. Since we use a longer term approach in our Intrinsic Value methodology our targets don’t change much, if at all. We probably picked a great time (October 1st) to release our model portfolio over at The Creative Destruction Fund.
Posted on September 12, 2008
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Credit Suisse (CS) stock equity analysts will be using Gerson Lehman (GL) consultants to help them actually do a little primary research. At the same time Gerson clients who want to speak to an industry expert equity analyst but not wanting investment advice will be able to consult with Credit Suisse stock analysts. (Article Link.)
Many of our institutional clients have said the future would be that they "pay by the analyst" and not "the shop." This is clearly a step in that direction. Large brokers like CS often insist on hefty minimum commission levels for their clients to get full access to the CS research product, analysts and events. But most of those clients also have relationships with GL where they do their own research and can pay by the hour. Now they can talk to the same CS analyst by appointment and pay a fee. CS may say that their analysts will not talk stocks with GL clients but most investors want to talk about industry dynamics and fundamentals anyway so this may not work so well.
Of course CS analysts may benefit from having a ready network of company and industry contacts to speak to. The bad news is that companies have clamped down fairly heavily on information sharing for a fee to anyone outside. This is making it harder to mine the network for great information. However it will be a vast improvement over the resources that CS analysts have today. What they may or may not enjoy is the "hourly consulting" business that they may be getting themselves into for GL clients. We expect it will be governed but it’s not much of a boost to your independent research agenda.
For GL buy-side clients it raises some questions about how "special" the information they get from GL will be if brokers like CS are getting it too.
The overriding question for us remains "Is this going to create better, more valuable research and expand the industry?" In this case there are two pieces to consider. Will having access to CS analysts boost demand for GL? Will CS analysts routinely provide better research and become a source of money making ideas and insights that clients will actually pay *more* for in two years?
At this point it doesn’t feel that way. It seems more like CS wants to limit their investment in research, resell GL to their clients and put more of their analysts on a meter which is at least measurable. Firms like CS are spending $1B+ on their research efforts and still having a hard time figuring out where the value is. The basic reason is that the regulatory and compliance burden, combined with the restructuring of the brokerage, money management and investment banking use of research has created an environment that is basically anathema to doing great top-down/bottom-up thoughtful research work.
Gerson Lehman has certainly come up with a good model that is based on on-demand primary research conversations across a network that is paid on a variable versus a fixed cost basis. Input from our clients says that many, if not all, of their research relationships will have to offer that dynamic so that they can easily scale their research payments based on how much the use the resources.
At least CS has done something to try and evolve into the model. There are plenty more moves coming soon. We expect more research for fee distribution elements to move mainstream in Q4 and more broker/dealers will try and rationalize their research efforts even further..
Posted on September 10, 2008
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We’ve had Google as a core long name in our portfolio since their IPO. As the company grows and the stock appreciates there is often an anxiety around if they still "have IT" to keep the momentum going.
The short answer is that we still thing so and since we maintain our Intrinsic Value (IV) estimate of $800/share the current price is very attractive to us right now. We’d start to move up to a full position at these levels.
As a company grows it’s often the management team that concerns us. The founders are young and the CEO, Eric Schmidt just seemed like the luckiest guy in the world more than anything else.
However Eric has grown with the job and is of course a very bright guy (went to Carnegie Mellon after all!) and has had quite a bit of experience.
This video interview of Eric from May of this year is an hour long but important to watch. Google is doing some interesting things in building the culture and the management of the company that are as important as their technology and traffic growth. We don’t buy the "do no evil" line but many of their organizational ideas are part of what makes them continue to be successful.
[If you want to skip any part there is a time in the Q&A when a woman starts talking about how much her young daughter knows Eric Schmidt that is worth the effort to skip. She blathers on for over five minutes who doesn't really even have a question after her "preample" which she insists was necessary in order to waste everyone's valuable time.]
Posted on September 10, 2008
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Everyone knows that NYC is a very expensive place. It wasn’t long ago, 1989-1990, when people were desperate to sell in NY and prices were very reasonable. We had the market crash of October 1987 and then a bit of a recession after that. It took about three years for the market to bottom and it spent another five years in a healthy phase before going vertical around the time I sold my last NYC property in 1995. (Isn’t that the way it always is?)
We’ve had some major financial market cracks but so far the NYC real estate market has held up remarkably well. Many things are still just amazingly expensive. The cost of doing business in NYC isn’t Dubai it’s very high compared to just about anywhere else in the region.
Of course it is the one-and-only NYC and the weak dollar means that plenty of foreign money finds things in NYC still "cheap" when adjusted for currency and high prices elsewhere (like London or Dubai.)
Still the loudest music playing in the NYC party tends to be from financial services which has been in a bad condition for the past year at least. First we had the evaporation of Bear Stearns and now Lehman brothers is another mighty bank that traded for $60 a few months ago and now is a single digit. We all know the story of leverage too well at this point.
We’ve watched it all with interest. We still count NY as one of our homes (albeit just north of NYC) and wonder if one day we may again set up operations inside the City.
Most say that low prices will "never happen" and we aren’t betting on it either. But we still remember buying the first NYC property in 1989 and seeing owners of lofts begging for offers that were equal to their outstanding mortgages and thinking that we would possibly offer 1/2. It was a painful time for property owners then.
Today plenty of projects have been cancelled and half-finished homes sit on the market around NYC. This was a result of the first round of declines and the implosion of The Bear. Now if we add more rounds of layoffs at Citi and a withering Lehman what will we get?
Could a long financial bloodletting continue and with a higher dollar attenuate foreign interest in NYC? Could the allure of even better places play a role? Who can say. The one thing that is for sure is that there’s a real lag between the fallout in the market and financial services and the change in prices for NYC area real estate. We seem to still be in the down leg of the financial fallout. Could mean the NYC real estate impact is well ahead of us.
Posted on September 3, 2008
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While we were busy doing a little real work on Palm we noted the change in management at Alcatel with a little bit of interest. Alcatel doesn’t fit into our research themes very well as it’s basically a giant telco conglomerate at this point but we’ve had some very profitable history with such ugly companies in the past. (Unisys and Sterling Software both come to mind, very boring to our clients but we find 200-300% returns in fairly large stocks interesting enough in their own way.)
Alcatel is a beast with something in the range of an $18B run rate and around $1.5B in EBITDA generation per year. As a conglomerate it’s everywhere but without much of a unifying strategy or operating plan. The company has a long history of volatile growth and margins. Operating margins over the last 14 years have been more negative than positive with the peak being 11% back in 1998. It’s probably fair to say the company has not made money on a cumulative basis in the last decade or two. The ability for the company to come up with a plan that will create some sustainable improvements in operating margin is unknown at this point. The scale of the problems doesn’t seem to be addressed by a simple management change at the top.
Still investors love a company with lots of "fat" to trim. It’s worked wonders for IBM and HP in the past. But of course for Alcatel the markets and situation is a bit more complicated. But Alcatel has been improving the mix of business to be more services and enterprise (about 1/3 of the total now) that at least have double digit operating margins. If management can drive these forward while rationalizing the massive overhead and corporate cost structure investors would get interested.
However when we do a little back of the envelope figuring on potential share price gains it dampens our enthusiasm. If the company can get to a 5% operating margin the EPS is something like 40c/share the shares already reflect a 15x multiple of that. It just means we probably have to wait until we get some cues from management as to what they plan and then spend a little more time with the business model to see how far they might be able to go.
Meanwhile we think we have more reason to keep working on PALM.