Well this week’s Barron’s cover certainly helps explain the nature of recent Barron’s cover stories (Bull on Pogo stick Dow 16,000, Millennials as Generational Saviors) that we have referenced in recent blog posts and reports. Always interesting to wake up on a Saturday morning five blocks from Haight Street and see a marijuana leaf on the cover of one of the nation’s most venerable financial publications. Ironically of the three the current cover is arguably the most controversial at face value and least controversial in terms of fundamental arguments.
This newfound trend toward sensibility could also be found in this week’s magazine in an article questioning the exclusion of stock based compensation from earnings estimates and noting the valuation implications of doing so. Generally speaking Terrapin is fairly well positioned with regard to this topic, with short positions on some of the most egregious offenders (CRM, AMZN) for whom stock based comp represents 100% or more of non GAAP earnings, and meaningful longs on some of those deemed to be solid citizens (MSFT). We do however have our share of long ideas on the scofflaw list (BRCM, GOOG) though in general tend not to get overly worked up on this topic, seeing it as one of many potential yellow flags on earnings quality. The impact of option issuance is felt in fully diluted share count, though the article does make a fair point about the role of share buybacks in diminishing that impact.
Though the residue of the activity in the cover feature department appears to have crept into the technology department this week, leading to a euphorically bullish story on the potential of INTC’s share price to double in five years (perhaps sooner!). The thesis is focused on four factors and largely reflective of the consensus sell side bullish thesis (1) increasing smartphone and tablet penetration (2) continued increases in data center/server revenue (3) a macro driven recovery in the PC business and (4) potential for growth on the foundry side. We continue to see far more attractive fundamental exposure to the first three elements in the thesis at Microsoft, which has been consistently outgrowing Intel in its data center focused businesses, will share in any PC related recovery, and in our view has better prospects for meaningful and material penetration of mobile device markets all while trading at a modest PE discount to INTC. And while Intel has made some reported inroads in the ARM-based Android ecosystem of late with a rumored win in a Samsung Galaxy tab. It remains unclear whether Intel might have more to lose in the PC arena to ARM than it has to gain in mobile. MSFT stands largely outside of this debate with Win8 variants running on both processing platforms. As we noted recently in context of the Xbox launch, we also find the company’s consumer/entertainment focused prospects to be far superior to Intel’s. There was no mention in the article of Intel’s OTT/set top initiatives, and the company has not been a major player on the gaming console/graphics side with the likes of AMD and NVDA picking up most of that business. On the semi side in particular, we continue to find NVDA relatively more attractive as well with far more developed and material exposure on the mobile front, similar exposure to any PC related upturn and still very attractive value given the cash balance.
Sticking with Microsoft for the moment, the company’s marketing department has been busy of late turning out effective advertising, as we noted recently with the “wedding brawl” ad for the Lumia 920 and more recently with the “less talking, more doing” ad pointing out in a clever and amusing fashion once again reminiscent of Samsung’s iconic Galaxy S2 ads some important differences in capabilities and price among Win8 tablets and the IPad. Given the company’s push into the smartphone and tablet markets consumer branding is more important than ever, and we expect these efforts to be aided by the Xbox One launch later in the year. There is a great deal of innovation and creativity on display at Microsoft these days in terms of both developing and marketing new products.
So much so, in fact, that at least on the mobile side the look and feel of the WinPhone user interface appears to be inspiring some copy cats. A recent ad for the BlinkFeed feature on the HTC One looks like a combination of WP8 Live Tiles and Flipboard and the “app digging” theme referenced in the ads speaks to a big part of the value proposition of the WinPhone UI. It is unclear that tiles that update continuously is close enough for trouble from an IP perspective, and as the clumsy closing line of the ad indicates “It’s everything your phone isn’t” the guys at HTC appear to be having trouble finding the line between a gentle ribbing employed in the Samsung and Nokia commercials and something offputting (eg think anything AT&T has ever done up until the 4G kids roundtable ads). I know I am focusing on advertising a lot here, but as Apple can attest it’s important, gives a good insight into senior level decision making and potential consumer appeal. HTC by the way stands as Nokia’s main competitor in the WinPhone market in the US with the 8X, and we note that despite some recent weakness in NOK shares we are unable to find a black Lumia 928 available anywhere, including Best Buy and Amazon. We remain big buyers under $4.