The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

29 January 2008

To Hell in a Handbasket

First things first.

The market is about to prove wrong my analysis re VMWare/VMW; stated differently, I am/was wrong. Questions:

1) How am I wrong?
I perceived VMWare/VMW as a market leader; as such, the shares should not have declined, at this time, to ~$58. Having done so, a new chart pattern emerges: lower highs and lower lows, which is my denotation of a bear market process. It is this precise point at which I lose all interest. (Recall I invest only in market leaders.)

2) What will I do, how will I proceed?
Many different constituencies comprise the market; the negative component now has primacy. So what happens next is tricky. There exist chart levels that will cause some buying from traders who know those chart points and thus purchase for short term (dead cat) bounces, however ephemeral. A key constituency that must rise to the fore now is VMW's floor specialists; it is their obligation to always take the other side of a disorderly market. (A one-way market is disorderly.) Specialists go home each day flat, and so will rarely, if ever, purchase at prices they believe subsequent action will not prove as low. (This activity will be apparent in today's 1 minute charts.)

After the next 1-5 days, I expect a bounce back to ~$68-70 (depending on the new low), so I will sell all my shares on that bounce, which should begin and exhaust itself within the next 2-5 weeks. That is, I will ignore today's massive price down gap, sit through the coming days of follow-on weakness and volatility, with the objective of selling at a higher price than available now. I will NOT single-point my bounce objective, but will monitor closely VMW's coming chart dynamics. And then sell. Period.

3) How wrong am I, really?
On its conference call, VMWare executives stated the following (from
U.S. revenue for 2007 grew 84% from a year ago to $721 million, and international revenue increased 94% to $605 million...
U.S. revenue represented 52% of total revenue in Q4; saw strength in all international markets, continued to invest globally in sales, marketing, and product support... did not receive any benefit from currency translation... overall transaction size is increasing... co repeats stance that they would not put too much weight on operating margins as they will flucuate during co's expansion...
licensed revenue and deferred services revenue from the November / December timeframe will be recognized in Q1 of 2008 ($54 mln). Q4 reflects revenue and deferred revenue reported during the quarter from OEM bookings in August and September. Like last quarter, there is some sequential increase expected which will benefit Q1 2008...
Expects operating margins in 2008 to remain in mid 20s but says there may be a slight seasonal down tick in Q1... guidance for 2008 rev growth of 50% YoY comes to roughly $1.99 bln vs $2.08 bln First Call consensus... Expects % rev growth to be higher in 1H08... co is not working in a price decrease into guidance (so do not expect competition to cause them to lower)... co notes that they have been doing guidance internally so not just a shot in the dark... 50% rev growth guidance is largely based on the scale of their business... co says did not see any notable weakness in the U.S. markets in any particular quarter... not providing a breakout between services and license in guidance...
Sees great demand, but they need to see how the market develops before they make some assumptions... says competition is not delaying sales; says customers have tried some competitors products and told the co they see no reason to switch... guidance does not take into consideration a significant upswing in desktop... Expect to continue to grow deferred revenue at a substantial rate... co says have been building guidance independently of EMC... co states that they are not providing capex guidance at this time... reiterates belief that they can maintain prices.
A number of analysts are out commenting on VMW's results this morning, with most firms viewing guidance as conservative (as I mentioned in yesterday's post) and cutting their targets...
Citigroup notes that VMW's stock fell 26% after market based on a Q4 revenue miss of $5 mln relative to Street ests, but beat their ests by $5 mln and EPS by $0.04. They note that VMW's conservative 50% total rev growth for CY08 further compounded the miss, as it was below consensus ests for 57% growth and Citi's 51% est. They believe VMW's initial 50% total rev growth for '08 will prove to be conservative based on VMW's overwhelming market share (80%+), few legitimate competitors, limited overall market penetration, no major price pressures, and a doubling of headcount in '07. They believe there could be material upside to these ests, and while they acknowledge few near-term catalysts coupled with an upcoming share lock-up in two weeks creates added volatility, they believe the pull back in the shares represents a compelling opportunity for long-term investors. The firm cuts their tgt to $83 from $134, and sees strong downside support for the stock at $50 which represents ~1x PEG on their '08 EPS est...

Jefferies lowers their tgt to $74 from $129, saying they recommend buying VMW today on weakness despite the revenue miss. They think 2008 revenue and margin guidance seems conservative, and the larger themes of cost savings and improved ROI from virtualization remain intact...

Deutsche Bank lowers their VMW tgt to $75 from $83, saying they expect VMW to remain volatile after a 4Q07 that missed elevated consensus expectation, a premium valuation and guidance that implies an unanticipated deceleration in growth profile of the business in 2008. They expect the co to gain/maintain market share as virtualization penetration increases...

BMO Capital lowers their tgt to $60 from $75, saying guidance looks conservative, since they have not seen a change in customer interest, competitive dynamics, or pricing. However, they are concerned about slowing license revenue, and have stated previously that they have no interest in getting constructive on VMW...
Hmm, I discern a theme: this immediate price weakness is a result of the perception of company weakness rather than its reality; that is, these numbers are trememdously positive, but the stock is (being) punished for the seeming timidity of company executives and their 'conservative' outlook. I suspect that, given sufficient time, the stock will recover; say, 1-3 more quarters of bullish earnings reports that show no slackening of demand for the company's products.

None of the foregoing helps "Lu/vmw/Being Sad" who writes...

"So sad... This is like gambling... You are right that entering a bad stock at a good time is better than entering a good one at a wrong time..."

"I cut it AH... I guess it won't come back to 80 for a long long time... I am worried it might go lower to 30-40 in a bear market... I guess everything is right... But, just it hit a bear market and PE is too high..."
I hate to admit it, Lu, but, yes, investing is akin to gambling... but only insofar as to the investor's reliance on odds; that is, there is no sure thing when investing, as in life itself.

Chad Brand offers interesting comments (Thank you!) in his note...

This kind of thing happens all the time when you are dealing with stocks that are so overpriced. A stock trading with a P/E of 100 with large companies gunning for them has a lot to lose. Price erosion is just going to get worse as new firms that can undercut them on price enter the market. Looking at charts works to some degree, but you can't ignore valuation, as that is what tells you how high the bar has been set. Good luck everybody.
Yes, Chad, "this kind of thing happens all the time" -- but for all stocks, not solely those "that are so overpriced." I agree that high P/Es, increasing competition, and a reliance on chart analysis all to be fool's gold; and which I addressed previously. I also suspect you recall your many "value" opportunities that have declined a similar number of points after your recommendation / purchase. So the distinction arguably is not value vs growth, but market dynamics.

There are many ways to skin the cat of consistent success when investing. For me, however, a value stock is merely a growth stock that has stopped growing (rapidly). The former high-flyer falls back to earth, its valuation shrivels, and a new phase begins for the company's shares. To purchase only one class of shares solely because the investor believes the stock has no more deep price plummets in its future is equal folly; in effect, the investor owns a portfolio of investments he or she believes cannot decline precipitously, but whose share price rises will match, at best, the market's return; a coeval. Contrast that methodology with the opportunity to participate in a company's rapid growth and a commensurate rise in its share price -- but with such opportunity also comes the risk of sudden dramatic share price declines.

Of course, I prefer my favored opportunities would never decline 25% in one fell swoop; not to expose myself to that risk, however, means I would never have the opportunity to purchase the leaders -- leaders in the market, leaders in their product space, etc. Consider the many outstanding opportunities (Apple/AAPL, Chipotle/CMG, Google/GOOG, Intuitive Surgical/ISRG, etc) that value investors have passed on largely because they feared a sudden share price drop (ala what occurs now with VMWare/VMW). The investor can mitigate this risk ("He who lives by the sword shall also die by the sword") via sound money management, as one arrow among the many arrows in his or her quiver. Anything else is merely Babe Ruth pointing to the center field wall.

Full Disclosure: Still long the shares of VMWare/VMW... for the nonce.
-- David M Gordon / The Deipnosophist

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28 January 2008

Ride My Seesaw

VMWare/VMW reports its quarterly results after the close of trading today. Having limned previously the fundamental story in favor of VMWare/VMW, and at length, now seems a propitious moment to share my thoughts re its chart...

A once clear, and bullish, setup has become turbid (chart below). Depending upon the investor's perspective, the pattern now could break in either direction; i.e., I could make an argument both bearish and bullish.

[click on all charts to enlarge]

Bearish: Something in the earnings report -- whether earnings and/or revenues prove insufficient, or the company provides conservative (read, bearish) guidance, etc; each unlikely -- could spook traders, who, already nervous by the markets' horrific decline, sell the stock. VMW thus could plummet (in one fell swoop?) to crucial support at ~$73-71. And possibly lower, which is the key reason a close beneath ~$71 represents my stop loss.

But there's the rub. Please recall that, if identified correctly, former resistance becomes support. The delineated trend line shown (chart above) likely is correct, and thus important and crucial. Which leads into the...

: A minor aspect of the setup for VMW is its positive divergence from what occurs in the general markets. I have discussed previously the topic of divergences, which offer a critical perspective on the markets seeming random nature.

The chart above is again VMW, but with an overlay of the NASDAQ Composite (ticker: COMPX). The COMPX and VMW each hit its respective high in late-October/early-November, and subsequently sold off to hit a concurrent low in late-November (point #1). Since then, the COMPX has roared to lower lows, whereas VMW has traded at marginally higher lows; thus, the positive (price) divergence. This divergence could be prefatory to ever more positive (bullish) price action, proving VMWare/VMW's role as a market leader. Or today's after hours earnings report could usher in a change in status to laggard from leader, and the shares swoon dramatically in a catch-up move to the general markets swoon.

IF the shares respond bullishly to the news from the company, upside breakout levels include:
1) $83 - important;
2) $85-87 - important;
3) ~$103 - crucial.

The breakout above $103 manifests as crucial because it proves and reifies the bottom; in fact, the potential double bottom.

Although comparatively brief -- and despite the fact I detest viewing opportunity through a single filter, especially one fraught with often erroneous perceptions as technical analysis -- I hope this post offers some guidance in advance of the likely wild and wooly, and directional, trading that will arrive after the close of (regular) trading today. (btw, you can read here, if interested, another analyst's perspective re VMW's earnings report and expectations.)

Full Disclosure: Long VMWare/VMW... but nervous.
-- David M Gordon / The Deipnosophist

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26 January 2008

The zip skinny

Reader, SA, shares...

"An interesting tool that gives you complete breakdowns of income, education, and race of any zip code in the US."

Interesting, yes, but also fun and handy!
-- David M Gordon / The Deipnosophist


The Dentist

Tim Conway and Harvey Korman perform an absolutely hilarious, uproariously funny skit for the Carol Burnett Show.

Of course, I could not stop laughing.

-- David M Gordon / The Deipnosophist

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25 January 2008

At the helm

I am still here, and acknowledge that I should be posting like a dervish about the markets... but, alas, I have become horribly entangled in setting up a new CPU. This effort siphons away most of my time, albeit not all of my attention, from the markets and you. This effort should conclude this weekend, though, and then I will return with several new posts. (That would be an objective, not a promise!)

Meanwhile, this time wastage reminds me of science fiction author, Robert A. Heinlein (as quoted by Cowboyo), who had a character in his novel, TIME ENOUGH FOR LOVE, say...
"A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, and die gallantly. Specialization is for insects."
Yep, sounds about right. If only...
-- David M Gordon / The Deipnosophist


21 January 2008

Competition, Virtualization, and VMWare

This post might be my final post re VMWare/VMW because... well, I do not want to overstay my welcome and bore you as I did with my drum-beating for Google/GOOG.

But what a way to exit -- a very bullish commentary from THE ECONOMIST (link embedded) that offers crucial insights into VMWare: its products, its competition, and the power of being the first mover...

"The ultimate goal of virtualisation is to make a data centre, or even several of them, look like a single pool of computing, storage and networking resources that can be allocated as needed... Yet for the vision to become reality, something is still missing: a set of tools to manage all these computing resources—an operating system for the data centre, if you will. VMware is well on its way to building just that... it has become one of the fastest growing software firms, a fact that explains its blockbuster flotation last August (EMC still holds a majority stake). Although VMware is best known for its hypervisor, it now makes more money from a suite of other products, such as software to manage virtual machines. And it has been successful at persuading other computer firms to make their wares work well with its products, thus building an ecosystem around its emerging platform. How was it possible for a newcomer to leave incumbents such as HP, Microsoft and Sun Microsystems in the dust?..."
Full Disclosure: Long the shares of VMWare/VMW.
-- David M Gordon / The Deipnosophist


The rise of the hypervisor
Jan 17th 2008 From The Economist print edition

Is this the most disruptive technology in business computing since the internet?

HISTORY may not repeat itself, but it does sometimes rhyme. In 1980 when IBM asked Microsoft, then an unknown software firm, to provide the operating system for its personal computer (PC), it made the mistake of allowing its supplier to license the software, called DOS, to other hardware firms. DOS quickly became the dominant computing platform for the PC and the basis of Microsoft's might.

Two decades later Microsoft may have made a similarly seminal mistake. In 2002 it balked at paying a high asking price for VMware, then also an unknown start-up. VMware was later acquired by EMC, a big data-storage supplier, but the Silicon Valley firm remained largely independent. This allowed it to develop software that may yet emerge as a dominant platform in its own right—not for single computers, but for the vast warehouses full of machines, known as data centres, where much computing will be done in future.

VMware's claim to fame is a technology called virtualisation, originally developed for big computers such as mainframes. It allows computers to split themselves into several “virtual machines”, each of which can run its own operating system and applications, in effect separating software from hardware. To do this, VMware developed a small program called a hypervisor, which controls how access to a computer's processors and memory is shared.

Before VMware came along, virtualisation had lingered in obscurity. Rather than splitting up big machines, firms found it easier to use small ones for each new application. For a while, this was a rational strategy. Servers were cheap. Machines that ran more than one application were more likely to crash. Yet the approach led to “server sprawl”, turning data centres into complex warrens of understretched hardware that required ever more people, space and power to keep them going. So it is hardly surprising that virtualisation, which allows multiple servers to be consolidated into a single machine, is one of the fastest growing areas in the software industry (see chart).

As the software industry matures and consolidates—this week Oracle said it would buy BEA Systems, and Sun said it would buy MySQL—the emphasis has shifted away from fancy new technology and towards tools that cut costs and allow firms to do more with less.

Server consolidation is only the most obvious merit of virtualisation, however. Once computers have essentially become bits of software, getting new ones up and running takes minutes, not weeks. Even more important, servers can be moved around, even when in use. This allows for clever tricks such as concentrating virtual machines on as few computers as possible and switching off the rest to save energy. And particular server configurations can be packaged into downloadable and highly reliable “virtual appliances”.

It is not just servers that can be disembodied. Desktop computers are next on the list, because virtualisation allows them to be managed centrally. Operating systems and applications need no longer run on PCs on desks, but can run on virtual machines in the data centre that can be accessed remotely—theoretically from any PC in the world. Storage is also getting more and more virtualised, so that data can be shunted around just as easily.

The ultimate goal of virtualisation is to make a data centre, or even several of them, look like a single pool of computing, storage and networking resources that can be allocated as needed. Thomas Bittman of Gartner, a market-research firm, calls this “real-time infrastructure”. Yet for the vision to become reality, something is still missing: a set of tools to manage all these computing resources—an operating system for the data centre, if you will.

VMware is well on its way to building just that. Founded ten years ago by a bunch of computer scientists and run by Diane Greene, it has become one of the fastest growing software firms, a fact that explains its blockbuster flotation last August (EMC still holds a majority stake). Although VMware is best known for its hypervisor, it now makes more money from a suite of other products, such as software to manage virtual machines. And it has been successful at persuading other computer firms to make their wares work well with its products, thus building an ecosystem around its emerging platform.

How was it possible for a newcomer to leave incumbents such as HP, Microsoft and Sun Microsystems in the dust? One reason was that VMware had the right product at the right time. More important, VMware delivered “a non-disruptive disruptive technology”, as Ms Greene puts it. Customers can install it without having to rejig their existing set-ups. By contrast, other virtualisation efforts were too ambitious and required extensive changes.

Now the industry's heavyweights are fighting back with a vengeance. In recent months they have announced big virtualisation initiatives. HP and Sun want to bring technologies developed for their high-end servers to the rest of the data centre. Microsoft, meanwhile, will integrate its own hypervisor, called Viridian, into the next version of its Windows operating system, essentially giving it away—and raising the spectre of yet another antitrust case. (On January 14th the European Commission opened two new investigations to see whether Microsoft abused its desktop monopolies to restrict competition.)

Yet the most interesting competitor is another newcomer: XenSource. It distributes its hypervisor as free, open-source software but sells related products. Simon Crosby, the firm's technology chief, likens this to giving away an engine in order to sell a car around it. He believes this approach will help to spread virtualisation more quickly and prevent VMware from becoming another Microsoft. XenSource now has the necessary backing, having recently been acquired by Citrix, another software firm, for $500m. Some people think that if Microsoft fails to catch up with VMware on its own, it will buy Citrix.

Will VMware be able to withstand the collective onslaught? It is unlikely to crumble like Netscape, the most recent start-up to vie to become a new platform, since hypervisors are much harder to replace than browsers. And VMware has already reacted cleverly by slashing the price for its hypervisor and persuading hardware firms to embed it in their machines, putting it on a more equal footing with Microsoft when it comes to distribution.

Whatever happens to VMware, however, the virtualisation technology it has helped to popularise is here to stay—and will transform the economics of computing in the years to come. In particular, computing will be much easier to outsource. Perhaps the best way to understand virtualisation is to view it as an electronic form of globalisation: when borders disappear, everything is up for grabs.

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20 January 2008

Why ask why?

Often come the questions -- "Why do you do this? Why expend such effort as this website obviously requires... and for no pay?"

I never really had an answer to those questions... Until now. Sure, I claimed that I sought to help other investors, especially since popping my head out of my warren back in 1997. All the while, I strove to find my voice -- How best to share my market insights to help investors find serenity in the markets? Oh, and consistently successful results from their investing.

The effort has been a 10 year struggle; this website is its result. Many readers come and go, some frustrated, others angry. (The "angry" want me to satisfy their individual needs, not mine. As if I can be all things to all people.) So, yes, at times, even I question my motivations.

And, then, like manna from heaven, come testimonials such as this fine introduction by "Ambo Suno". "Ambo" honors me with his regard, his esteem, and the perception that while my efforts might be a struggle for me, they still offer meaning and value.

Thank you, "Ambo." And thank you to all the other readers who glean value from my ramblings. I am here for you.

Full Disclosure: Long the friendships and connections that come from reaching out to other people.
-- David M Gordon / The Deipnosophist

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17 January 2008

Fight Club

My friend, Marc Denny, is a fine, upstanding citizen, a good, well-intentioned fellow, and I like him very much... but he is absolutely loony.

Okay, that last comment requires some explanation / background. Some people would say that Marc (aka, Crafty Dog) is loony because his first profession was as an attorney. Enough said. Other people argue Marc to be loony because he gave up that career to became a politician. Enough said again. (btw, in California several years ago, Marc darn near defeated a better financed opponent with substantial name recognition.) Marc has a tendency to begin his letters with "Woof" and close with a "yip," which fact alone qualifies him as loony. Many people suggest Marc to be loony because he founded Dog Brothers, a merry band of fellows who find pleasure in beating each other silly with sticks. Yeah, definitely enough said. Marc refined and popularized a traditional martial art, Phillipine stick-fighting, thus furthering its popularity; in the effort, Marc gained sufficient fame that he now trains the US military's special forces units in hand-to-hand combat. In addition, Marc has been the subject of several magazine cover stories -- although he yearns for the glamour that comes with being named People magazine's "Sexiest Man of the Year."

But, no, I believe Marc to be loony because he is my sole friend who likely would join me in this 'sport' (I cannot claim that as fact; I never have done it, and doubt Marc has)...

(Thank you for the link referral, Alan W!)

As though Marc being my friend does not alone qualify him as loony, then consider this...

National Geographic TV will air next week the documentary, Fight Club, about Marc, Dog Brothers, and Marc's style of stick-fighting. Enter Marc with the details...

Woof to All:

Here is the info on the airing of the National Geographic documentary, Fight Club, about our group, the
Dog Brothers.

"The Dog Brothers is an underground fight club. Twice a year, they come together from around the world for a tribal ritual they call "The Gathering of the Pack," an intense day of full contact, one-on-one combat, using hardened rattan sticks as weapons. They fight in street clothes, with no protective padding other than gloves and a thin fencing mask. There are no rules, no judges, no referees, no trophies. They are fully aware that they can get hurt. That's the point... to face not only your opponent, but your fear, your self."

(Updated) Showtimes:
Eastern Time
Pacific Time
Wednesday January 23 6 pm and 9 pm PT (9 pm and 12 am ET)
Saturday January 26 7 pm and 10 pm PT (10 pm and 1 am ET)
Monday January 28 10 am PT (1 pm ET)
Wednesday January 30 2 pm PT (5 pm ET)

If you have any interest in learning more about your fellow readers of this blog, or even why a group of men enjoy pummeling each other, then watch this documentary. I will watch. I hope you will, as well.

Full Disclosure: I choose to walk life's dark alleys with Marc Denny.

-- David M Gordon / The Deipnosophist

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16 January 2008

Google, the iPhone, and the coming earnings report

Google Sees Surge in iPhone Traffic

MOUNTAIN VIEW, Calif. — Of all the iPhone’s features, none had reviewers gushing more than its Internet browser. It was the first cellphone browser that promised something resembling the experience of surfing the Internet on a PC. Santa helped deliver on that promise.

On Christmas, traffic to Google from iPhones surged, surpassing incoming traffic from any other type of mobile device, according to internal Google data made available to The New York Times. A few days later, iPhone traffic to Google fell below that of devices powered by the Nokia-backed Symbian operating system but remained higher than traffic from any other type of cellphone.

The data is striking because the iPhone, an Apple product, accounts for just 2 percent of smartphones worldwide, according to IDC, a market research firm. Phones powered by Symbian make up 63 percent of the worldwide smartphone market, while those powered by Microsoft’s Windows Mobile have 11 percent and those running the BlackBerry system have 10 percent.

The iPhone has taken the frustration out of browsing on a mobile phone, said Charles Wolf, an analyst with Needham & Company.

Other companies confirmed the trends, if not the specific data, observed by Google. Yahoo, for instance, said iPhones accounted for a disproportionate amount of its mobile traffic. And AdMob, a firm that shows billions of ads on mobile Web sites every month, said it saw traffic from iPhones surge drastically around Christmas.

“Consumers are going to demand Internet browsers” as good as Apple’s, said Vic Gundotra, a Google vice president who oversees mobile products.

Mr. Gundotra said Web browsers as capable as the iPhone’s could also prove a boon for developers of mobile software, who have long struggled to adapt their programs to different types of phones. As it does on the PC, he said, the browser could provide a more homogeneous “layer” for programmers.

“The reason no one considered this seriously is that the Web layer on mobile devices was terrible,” he said. Google has taken advantage of the capabilities of the iPhone browser to create a product, internally called Grand Prix, that it says provides easy access to many of the company’s services, including search, Gmail, Reader and Picasa.

Google, which developed the first version of Grand Prix in six weeks, is introducing a new version on Monday, just six weeks after the first one. That is a speed of development not previously possible on mobile phones, he said.

Google/GOOG will hold its quarterly conference call to discuss Q4 2007 financial results on Thursday, January 31, 2008 at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time).

The live webcast of Google's earnings conference call can be accessed at (Logon early, if you plan on listening in! -- dmg) The webcast version of the conference call will be available through the same link following the conference call.

Full Disclosure: Long the shares of Apple/AAPL and Google/GOOG.
-- David M Gordon / The Deipnosophist

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11 January 2008

Introducing... the iPhone

So, okay, we each believe we know the entire story -- but, in fact, we do not. This WIRED article goes a long way to clarifying several issues...

"It was a late morning in the fall of 2006. Almost a year earlier, Steve Jobs had tasked about 200 of Apple's top engineers with creating the iPhone. Yet here, in Apple's boardroom, it was clear that the prototype was still a disaster. It wasn't just buggy, it flat-out didn't work. The phone dropped calls constantly, the battery stopped charging before it was full, data and applications routinely became corrupted and unusable. The list of problems seemed endless. At the end of the demo, Jobs fixed the dozen or so people in the room with a level stare and said, 'We don't have a product yet.'"


"After a year and a half of secret meetings, Jobs had finally negotiated terms with the wireless division of the telecom giant (Cingular at the time) to be the iPhone's carrier. In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple's iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He'd also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer's AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry."


"At press time, analysts were speculating that customers would snap up about 3 million units by the end of 2007, making it the fastest-selling smartphone of all time. It is also arguably Apple's most profitable device. The company nets an estimated $80 for every $399 iPhone it sells, and that's not counting the $240 it makes from every two-year AT&T contract an iPhone customer signs. Meanwhile, about 40 percent of iPhone buyers are new to AT&T's rolls, and the iPhone has tripled the carrier's volume of data traffic in cities like New York and San Francisco. But as important as the iPhone has been to the fortunes of Apple and AT&T, its real impact is on the structure of the $11 billion-a-year US mobile phone industry. For decades, wireless carriers have treated manufacturers like serfs, using access to their networks as leverage to dictate what phones will get made, how much they will cost, and what features will be available on them. Handsets were viewed largely as cheap, disposable lures, massively subsidized to snare subscribers and lock them into using the carriers' proprietary services. But the iPhone upsets that balance of power. Carriers are learning that the right phone — even a pricey one — can win customers and bring in revenue. Now, in the pursuit of an Apple-like contract, every manufacturer is racing to create a phone that consumers will love, instead of one that the carriers approve of."


"The hosannas greeting the iPhone were so overwhelming it was easy to ignore its imperfections. The initial price of $599 was too high (it has been lowered to $399). The phone runs on AT&T's poky EDGE network. Users can't perform email searches or record video. The browser won't run programs written in Java or Flash. But none of that mattered. The iPhone cracked open..."

And more. Really, there are many, many aspects to this well-written and fascinating article that will command your attention, even if you have yet to invest in Apple/AAPL shares alongside other investors, me included...

Full Disclosure: Happily long the shares of Apple/AAPL.
-- David M Gordon /The Deipnosophist

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09 January 2008


I will be away all day today and evening. You will find me wandering the many, many booths of displays at the International Consumer Electronics Show (CES) doing deep research.

No, really!
-- David M Gordon / The Deipnosophist


08 January 2008


The Internet has been abuzz the past 3 months with rumours of a new movie, originally code-named, 1.18.08, and then (and now), Cloverfield.

Little was known -- was the movie an easter egg for the TV show, LOST? (The movie's producer is that show's co-creator, JJ Abrams.) Was it a monster movie? Science fiction? Horror? About terrorists? So little was known, and nothing was leaked... until the movie's first trailer, which confounded all viewers not in the know, and thus served only to fan the flames of rumour into an all-out conflagration of buzz.

I understand the entire movie was filmed as cinéma-vérité; if true, consider it an unusual technique, although its story line demands verisimilitude. The movie opens only 10 days from now. We all can judge then whether the movie deserved the buzz. Until then, there is the trailer...

So, yes, I sit on tenterhooks. Include me as one very motivated attendee!
-- David M Gordon / The Deipnosophist


How now, brown cow?

Lu/vmw writes,
"How do you think about VMWare/VMW right now? Seems the whole market is pretty weak. Is it still a good entry point for long?"
"looks like your expected $71 was touched... However, the market is too weak... Every dip causes more panic on vmw... have you already entered?"
"I read your post one more time. Seems the expected upside resersal has not come. And, the market entered into a down trend. Do you still think it is still a bullish setup? I entered it above $90 and then read your post here. Now, I can only think about holding it for a long term (maybe, over a year). Now, I am really worried that it will shrink to a price under $50 and won't come back forever... As far as its product, it is not someting like google. It is something invisible for end customers and thus not so obvious. Maybe, this is a risk as well as an opportunities as you said."
The first item to keep in mind is that the stock is not the company, and that the market is not the stock. Let's deal with this reality in reverse order. In a letter to clients (dated 1 January 2008), I wrote,

"At the end, 2007 proved a difficult year in the markets. The equity markets had a dismal year -- up, down, and sideways, sideways, sideways; for example, while many commodities soared in price, their underlying share prices failed to keep pace.

"Activity of this sort confounds most investors; believing they must track the market step for step, they buy and sell, only to re-purchase, and all to no avail as they trade themselves silly.

"This lack of vision is not one that plagued your portfolios. Via diligence and discipline, I actively seek the market's leaders, purchase them at opportune moments, and then hang on for the long term (read: higher prices). Not every decision was perfect, but I am quick to admit errors, and then move on to the next opportunity. Your portfolio's return during the difficult year just ended reflects this successful investing perspective.

"At this moment, however, 2008 looks more... perilous than 2007 proved to be. Nonetheless, patience, discipline, and investment savvy and shrewdness will continue to win the investment race. Already I have identified two new opportunities that should help drive additional gains during the coming year..."
And, in mid-December, I shared with a handful of investors whose investment savvy I respect (I call them the Sounding Board) that I expected the equity markets to float higher into year-end, gap higher strongly on the opening of Wednesday, 2 January, reverse intra-day, close weak, and then usher in several weeks of plummeting share prices. All before finally stabilizing.

The point of sharing these items is not that time proved me correct -- I am too often wrong to crow about the random correct call -- but to reify the notion that I expected the markets to decline, but that expectation did not lessen my interest in VMWare/VMW. In fact, because my methodology is to purchase declines, the market weakness in general and VMW's share price in specific thrills me.

So, okay, the market's oscillations we understand, and accept. But what of, in this case, the plummet (or "panic") in VMWare/VMW's share price? Long time readers will know that I differentiate between a company and its shares; they are not synonyms for the same thing. "It is better to be in the wrong stock at the right time, than the right stock at the wrong time." Clearly, VMW shares have declined alongside the markets, but is its price weakness reflective of general market weakness or is something suddenly and horribly awry at the company?

You can guess my response; I believe the former, and dismiss the latter. I find opportunity in price (and time) oscillations; that is, these oscillations create the opportunities for us investors. To wit, the email message just now received...

Hi David -
How have you been? I haven't talked to you in a while but I still read your blog every single day.

I had a quick question for you. Today I purchased a sizable amount of ISIS as it hit its 200 day SMA. I was very pleased to see the stock bounce so well off this support and was simply shocked to see it up over 50% in after hours today. I have never in my life timed the purchase of a position so perfectly and I have you to thank for bringing this opportunity to my attention many months ago.

My lack of experience now leaves me pondering what to do and thus I turn to you for some expert advice. I have never been in a situation where my long term objective for owning a stock was hit in the first day I purchased it. While very exciting, I now struggle to decide what to do with my shares? Do I continue to hold, take some off the table or sell my entire position? How would you handle this situation? How do stocks typically perform after such huge gaps up like this?

I apologize in advance for my barrage of questions, but please understand my excitement. Thank you again, David - you run the best finance blog on the web today and I can truly say that I am lucky to have met (virtually) such an amazing person.

Kind regards,
Chad Lapa
President & Founder, BlueEye -- Professional Finance on a Personal Level -- We make good fisherman, even better
Chad found opportunity within seeming chaos; already familiar with Isis Pharmaceuticals/ISIS, he only awaited a decline in the stock's price. The recent plummet (to ~$12 from ~$18) provided both the signal and opportunity. Chad acted boldly, and now gets to reap the reward.

The objective, when investing, is to have your portfolio increase in value over [the passage of] time, and not fret overly much about yesterday's, today's, or tomorrow's price. Of course, easier said than done, I know. Read again Chad's letter, and consider the uncertainty he embraced when he purchased at an optimal moment and in the teeth of a prevailing headwind -- which has nothing to do with the reality that the share price reversed higher immediately after his purchase. 'Twas nice, but not always like that! I would bet that, knowing what he knows now (about successful investing, not how ISIS shares soared in price after his purchase), he would purchase even more shares than he did.

So, Lu/vmw, you should not fear VMW's share price decline, but instead perceive it as an opportunity. How low is low? I know not, but as the old quip has it, "If you like it at $80, then you will love it at $70!" Do I own the shares? Yes. Will I purchase more shares? Yes. Do I think "forever" must come to be before the share price again climbs over $90? No. Would I prefer the share price had not declined this low? Yes.

I include Chad's letter because it is a nice balance to an investor's usual fears; he purchased during an ugly, ugly market day, and recognized a pattern amid the swirling chaos and shrieks of pain. Alas, then, that I also must answer his questions...

I believe ISIS shares could trade substantially higher in the coming weeks and months, and for many reasons. The news (via that propels higher the stock after hours today (Monday):
"Isis Pharmaceuticals/ISIS and Genzyme/GENZ announce that they have entered a major strategic alliance in which Genzyme will develop and commercialize mipomersen, Isis' lipid-lowering treatment for high risk cardiovascular patients that utilizes novel antisense technology. As part of the strategic relationship, Genzyme will also have preferred access to future Isis drugs for C.N.S and certain rare diseases. Genzyme will pay Isis $150 mln to purchase 5 mln shares of Isis common stock for $30 per share upon Hart-Scott-Rodino clearance. Upon completion of final contracts, Genzyme will pay Isis a $175 mln up-front mipomersen license fee. In addition to this initial $325 mln, Isis has the potential to receive significant milestone payments for mipomersen, which is currently in phase 3 trials. Once the product is launched, the two companies will share profits."
Need I state this is big news? (Obviously so, David!) Need I say this puts the stock in play? (Remember I argued the possibility that Pfizer/PFE would acquire the company; this news makes any buyout much more costly.) Add the chart pattern itself: $18 represents a landmark breakout; while the shares could test again that level in the future, they need not do so. It is appropriate to ask here and now the inverse of my posed question in reply to Lu: "How high is high?" Only time will tell.

"I now struggle to decide what to do with my shares..." You answer your own question, Chad: " long term objective for owning a stock was hit..." There is no such thing as superior information; we each would drive ourself crazy thinking ourself to be so smart that we could master-mind the market's squiggles. My counsel is to leave off the attempt. You made an assessment of both risk and opportunity (reward), Chad, and in advance of market action; do not allow subsequent market action to dissuade you from your logical analysis. Investors get into trouble when they become emotional. So what if you sell some (say, half), and the share price continues higher? Guess what -- that higher price also validates your analysis.

In the final analysis, I have one word for you: Congratulations.

In a follow-on comment to my post below re VMWare/VMW and competition, I should mention that my analysis might seem, at first glance, to be simplistic, perhaps even idealistic. One reason for that conclusion would be that I neglected to tie up some loose ends. To put a fine point (and closure) on the topic...

Yes, competition is a good thing for all companies, but proves more pernicious for technology companies than for fast food restaurants. (I referred to Chipotle/CMG.) To endure, technology companies seek a wedge against its competition; this wedge commonly assumes the shape of either a solid brand identity or patent protection. Yes, competition is a real risk for VMWare -- a risk I limned sufficiently well, but also one that I suspect the company will hurdle successfully.

Full Disclosure: Long the shares of VMWare/VMW.
-- David M Gordon / The Deipnosophist

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02 January 2008


Harsha Reddy writes...

"The competition will be intense. Microsoft will make virtualization a feature in their upcoming Longhorn server operating system (OS). Microsoft's share of server OS is also steadily increasing, >60%. VMWare/VMW leads this space, but the lead is less than a year, in my opinion."
It seems I have a different perception re competition, both in general and in specific (Microsoft/MSFT). To wit...

1) I consider competition to be good. Healthy competition generates imagination, creativity, and innovation. Consumers benefit from better products at less expensive prices. Of course, and as we each note, the perception by investors of potential shriveling profit margins and thus a possible declining share price is a legitimate concern. Nonetheless, I cling to the notion that Microsoft's entry into the virtualization space will improve VMWare's products. Whether VMWare proves successful at branding its product remains an unknown. Should this come to be, the company's success will endure for more than a mere season or two.
2) Microsoft is a tough competitor, but it is not, nor will it be, the sole competitor in virtualization. It might not even rank as the key competitor.
3) When VMWare's founders discussed the notion 10 years ago of creating the company and its products, do you think they failed to discuss that competition would arise as a direct result of their success? The more successful the company's virtualization products, the more competition the company would self-create. I suggest the company's founders considered in advance the probable competition, and how the company would respond.
4) I believe Microsoft stretches itself kindasorta thinly these days:
• Its continuing battle for desktop supremacy;
• Its battle with Google/GOOG in online search (advertising);
• Its battle with Apple/AAPL's iPod (its Zune MP3 player);
• Its battle in gaming software (its xBox vs Nintendo's phenomenally successful Wii, et al);
• Its battle with Cisco/CSCO for network applications, as Pat Trolan shared. ('Tis odd, I believe, that Microsoft claims these applications need not be network applications, but they claim the opposite re its virtualization product, as you note, Harsha.)

How many things can one company do especially well? And how good is any one of the company's 'solutions' when the company has no consistent corporate raison d’erté? Microsoft runs the peril of confusing itself more than being a confident competitor. It lumbers now, as it always has, with its me-too products.

Should VMWare/VMW investors fear Microsoft's virtualization product? Perhaps, as caution always is a good thing. I suspect, however, that Microsoft's product will come late, will not offer the the same quantity and quality of solutions that VMWare's products deliver, and will not be an organic, customer-driven solution to a pressing need, but instead a company-driven solution to corner yet another market. Or at least attempt to do so.

In any great (enduring) growth story, competition helped each company to innovate continually, to focus on the customer, and sometimes even lowered the price for the company's product in a beneficial form of price deflation (especially true in technology). And the company's share price rose, and rose, and rose some more. The share price rise was sometimes due to the company's success, and sometimes because the company was purchased... by its competition. Hmmm.

Consider, for example, Chipotle Mexican Grill/CMG...
• The company competes in the restaurant segment of the economy, in which there are many, many competitors;
• Its segment is, specifically, fast food restaurants, in which there, too, are many, many competitors. Many of whom are better-financed, or have deeper pockets.
• Among fast food restaurants, its precise space is Mexican food; in particular, burritos. Here, too, are many, many tough competitors.

Guess what? Despite the competition, the company quickly rises to the fore, to become the creme de la creme.

Is a similar future possible for VMWare/VMW...? Only time will tell, but I like the odds.
-- David M Gordon / The Deipnosophist

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