Ever since Apple (AAPL) announced it was getting into the smartphone business, many analysts have yapped about how the IPhone – or whatever it ends up getting called – will take competitors to the cleaners. PPPPleaseeee! I’m so tired of the claptrap that I feel compelled to offer my take on AAPL’s decision by revisiting my most favorite tech duel of the moment: ADBE vs. AAPL.
The duel is rooted in the early days of the folio. Back in October when I wanted to spice up the folio with a tech stock more volatile, relative to the S&P, than MSFT (Beta 0.71) but less so than EBAY (Beta 3.91) – ADBE (Beta 2.31) and AAPL (Beta 2.40) were the prime candidates on a list of 25 IT firms examined; yes, full-throttle Google was considered but I can’t quite see through the maze of how it makes money. Naturally, AAPL’s smartphone decision has prompted me to reexamine my allegiance to ADBE.
My Friend’s Enemy is……
Currently there are about one billion internet users around the world. But there are even more mobile phone users, reportedly 2 billion and growing faster than internet users. One of the major technological shifts currently afoot is the shift of desktop content and digital software to mobile devices. I’ve said before and I’ll say it again: ADBE has such a commanding share of the computer digital software market, ceteris paribus, that it’s better placed than many competitors to make a killing in this increasingly unwired world of ours.
Right now AAPL’s competition with ADBE is limited to the latter’s Creative Suite product, which includes the ubiquitous Flash Player. AAPL’s foray into smartphones could lead to more cooperation with ADBE, thereby building on existing software licensing partnerships. But the move is likely to bring more head butts with ADBE than kisses.
The adoption of Flash Lite technology, which is ADBE’s signature product for mobile devices, has been particularly strong over the past year. The firm announced last week that the number of Flash Lite enabled devices shipping worldwide has tripled since January 2006, to reach more than 200 million, most prominently in Japan as a result of a partnership with NTT DoCoMo. The Japanese lead the world in mobile phone technology so you know whatever “blows up” there usually takes off elsewhere. Sorry I digress for a New York minute.
The success of Flash Lite has been driven by ADBE’s key relationships with players like Nokia, Motorola and Samsung. These are the 400 pound gorillas AAPL will be going up against with the IPhone. I know AAPL’s reputation and success are built on market disruption but I have a feeling it’s about to bite more than it can chew.
A Good Swimmer in Shark-infested Waters
With a return-on-equity of about 25% - ADBE’s ROE is 14% - and strong brand recognition AAPL is a tempting stock. Macs are flying off the shelves and IPods keep getting more nanos, shuffles and whatever else. But is AAPL getting drunk off IPod juice? I mean, it may have 75% of the portable digital musical player market but the smartphone market is a much more competitive landscape.
Sony took the blowout by the IPod on the chin perhaps because it had other businesses to fall back on and it wasn’t a “do or die” with the Walkman. But the smartphone business is the bread and butter for pure players like RIM and Palm, and increasingly so for handset OEMs like Motorola, Nokia and Samsung. Actually, Samsung and LG Electronics have already unveiled “IPhone killers.” In fact, LG’s version uses ADBE’s Flash technology to enhance user experience. These firms will not lay the red carpet for AAPL.
Some have argued that AAPL intends to target the “high-end” of the smartphone market to avoid much competition. Well, what exactly is the “low-end” of the market? These phones typically retail for over USD500! AAPL is going to go from a market it dominates – portable digital music - to a market where it’s just another player. Its profit and operating margins are definitely going to come under pressure.
The smartphone business is definitely a growth area for IT firms with the right value proposition. But unless you are already a mobile hardware manufacturer, the best bet seems to be in software development and content creation for mobile devices. AAPL is going to find this out the hard way.
Watch Your Tech
Why not just hold both stocks and close shop? I guess I could but such a move will make the folio too overweight in tech stocks for my liking. More importantly, it will break my cardinal rule to keep the folio no more than 25% weighted in tech. To be a good investor one must exercise discipline no matter the temptation. Right now the folio is 24% weighted in tech – MSFT 16%, EBAY 3% and ADBE 5%; the S&P is 15% weighted in tech.
Cardinal rule aside, the bottom line is this: I see AAPL’s foray into mobile handset manufacturing as bearish for the stock. Just because one is a good warrior doesn’t mean one can fight any war!
Tuesday, February 20, 2007
Friday, February 02, 2007
CostCo Flies Under the Radar in January
On Wall Street they say as January goes so does the rest of the year for the stock market – 85% of the time that is. Since the S&P ended January on a banger a blowout for stocks this year may be in the offing, if you happen to be in the right sectors of course. The folio is very diverse across sectors and market capitalizations so I’m assured a spot on any gravy train.
How much gravy I get to scoop is another matter. If January is any indication I’ve my work cut out for the rest of the year; on gains I ended January in the dog house:
Nasdaq 2.01%
S&P 1.41%
Dow 1.27%
Worst-known 1.06%
Is COST Riding the Minimum Wage Bill?
I support a higher federal minimum wage. It’s a well established fact that the federally mandated minimum wage, which has been stuck at $5.15 since 1997, hasn’t kept up with the rise in the nation’s productivity, much less with inflation – it should be about $6.75 as of January 2007 had it kept up with inflation. By 2009 Congress wants it to be $7.25, which is roundabout where it will need to be by then to keep up with inflation – assuming a 3% annual rate of inflation.
So what would Americans do with all this new money coming in? Since Americans hardly save the money is likely to be spent at consumer discretionary stomping grounds like CostCo.
Although COST has been trending higher since it broke a key resistance level back in October it didn’t really take off until the second week of January when economic data showed that the national average hourly earning rose more than expected. So it’s fair to say investors view rising hourly earnings as bullish for consumer discretionary stocks.
With Congress set to mandate a rise in the federal minimum wage I think COST is getting a minimum wage “bounce”. In January it had the biggest gain when measured by moving average (MA) of Returns to Date (RTD):
Change in MA of RTD (12/29/06 to 1/31/07)
COST +4.71%
NHP +3.60%
MSFT +2.28%
IWR +1.93%
PG +1.03%
IJR +0.51%
EFA +0.01%
EEM -0.83%
BAC -1.33%
ADBE -2.63%
PBW -2.88%
IGE -3.74%
EBAY -4.82%
SLV -8.74%
In December and January while many on the Street were fixated on techs it seems smart money was moving into discretionaries perhaps in anticipation of a rise in the minimum wage.
How much gravy I get to scoop is another matter. If January is any indication I’ve my work cut out for the rest of the year; on gains I ended January in the dog house:
Nasdaq 2.01%
S&P 1.41%
Dow 1.27%
Worst-known 1.06%
Is COST Riding the Minimum Wage Bill?
I support a higher federal minimum wage. It’s a well established fact that the federally mandated minimum wage, which has been stuck at $5.15 since 1997, hasn’t kept up with the rise in the nation’s productivity, much less with inflation – it should be about $6.75 as of January 2007 had it kept up with inflation. By 2009 Congress wants it to be $7.25, which is roundabout where it will need to be by then to keep up with inflation – assuming a 3% annual rate of inflation.
So what would Americans do with all this new money coming in? Since Americans hardly save the money is likely to be spent at consumer discretionary stomping grounds like CostCo.
Although COST has been trending higher since it broke a key resistance level back in October it didn’t really take off until the second week of January when economic data showed that the national average hourly earning rose more than expected. So it’s fair to say investors view rising hourly earnings as bullish for consumer discretionary stocks.
With Congress set to mandate a rise in the federal minimum wage I think COST is getting a minimum wage “bounce”. In January it had the biggest gain when measured by moving average (MA) of Returns to Date (RTD):
Change in MA of RTD (12/29/06 to 1/31/07)
COST +4.71%
NHP +3.60%
MSFT +2.28%
IWR +1.93%
PG +1.03%
IJR +0.51%
EFA +0.01%
EEM -0.83%
BAC -1.33%
ADBE -2.63%
PBW -2.88%
IGE -3.74%
EBAY -4.82%
SLV -8.74%
In December and January while many on the Street were fixated on techs it seems smart money was moving into discretionaries perhaps in anticipation of a rise in the minimum wage.
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