Monthly Archives: August 2008

Last week Felix wrote an interesting post on the valuation of high growth big cap tech, specifically Apple and Google. The debate in the comments was equally interesting. Felix thinks AAPL should not be worth more than GOOG, as recently become the case when the former’s market cap surpassed the latter’s. GOOG grows faster than AAPL, he points out, has higher margins, and is increasing market share in its core (web advertising) market while AAPL is losing share in its (iPod/iTunes); unlike AAPL, GOOG has a dominance in its fast-growing core market that amounts to a monopoly, option value from its many ventures, and finally no management succession risk. That should be worth a premium valuation.

All these points are either true or could be plausibly argued. So how can this be, given that the market prices in all knowable, digestable information (Felix is a great fan of indexation and presumably holds to a very dilute version of the efficient markets theory)? Why is a company with all these attributes trading at a discount to this relatively deficient one?

Baruch knows the answer. He gets paid to value high growth big cap tech. While he personally covers neither AAPL nor GOOG, in the vast expanse he calls his mind this does not disqualify him from opining about both companies firstly from the point of view of a Spinozist but secondly, from time to time, as a stock operator or “punter”. You will remember that from the first perspective, he likes neither of them very much. From the second perspective, Baruch has said he would actually be long AAPL here. In fact, the fund he works for is an owner in size. As for GOOG, it is a smaller position than the benchmark, an “underweight”, in the argot. Had he his druthers, moreover, Baruch would strongly consider a GOOG short.

There are two central concepts to tech investing — expectations, and the 2nd derivative of growth. Both of these concepts combine in interesting ways. Let’s deal with both, the role of expectations first. Continue reading →

TEN SQUILLION GODZILLION iPHONES. That’s how many they are making in the 3rd quarter alone. I only mention this to try to make myself look a bit better after having hung my dirty underpants out to dry this week, for I, Baruch, predicted just this! I am not a complete investment dolt! OK I didn’t give numbers, but I said, in a piece which was long term negative on Apple but short term positive (know, and do not confuse, your time frames):

Apple . . . has a window to build some scale. At the same price as an HTC, hell, I’d buy a 3G iPhone. I can finally see it taking off

and

this is what I imagine will happen: a flattish reception to the 3G iPhone launch in May or June (I hear it looks identical to iPhone v.1, and may not have GPS or a 5 megapixel camera), followed by amazing initial volumes of 3G iPhone.

There was a flattish reception; AAPL sold off a bit after a rally into the launch announcement and everyone seemed more interested in whether Steve Jobs had cooties or not. I hope he doesn’t. “MobileMe” didn’t work (one wag said the Blackberry version of this would be called “RimmMe”). But this 10 million number has blown my mind. “Amazing initial volumes” is an understatement. For context, there will be about 1.1-1.2 billion cellphones sold in 2008, according to like, everybody. So 10 million sounds like small beer. But that’s in one quarter, so really it’s 40 million annualised, which is 3.5% unit share from zilcho (iPhone v.1 was negligible), and then assuming a $550 average selling price — pre-subsidy of course – and a $120 ASP for the rest of the market, and assuming they actually sell them in Q3, well Apple just took a 16% share of the total value of the handset market, give or take. In other words, it just created the equivalent of RIMM’s handset business, Sony Ericsson, the equivalent of LG handsets. In one quarter. Just like that! Continue reading →

I, Baruch, have just had the worst 2 days of my investment career. My biggest short shot up 20%, argh, and my biggest overweight tanked thirty fricking five percent the very next day. As you know, Bento, I am a cheery chap most of the time, bounding out of bed every monday morning convinced that this could be the very best week of my life, why not, and ready, as an american would put it, to bite the ass off a bear. But right now I have to admit to a cold, sick, dread. My karmic cycle has clearly turned down. What else can happen to me, I wonder. Until all my money is gone, I tell myself, it can always get worse. On the occasion of the 1 year anniversary of the Bear Market, I think it is time for some reflection.

We underperforming fund managers generally have 3 distinct responses when delivering unpleasant news to our investors: 1) it’s not my fault, 2) everyone else sucks too, 3) don’t worry, it’s going to get better any moment now. I am no exception, and am going to try these out on you.

1) It’s Not My Fault. It really isn’t! Honest. I can’t complain about my big long blowup, these things will happen to us all a couple of times in our careers. As a contemporary of Spinoza put it, writing of the Amsterdam stock exchange in the 17th century:

Even if we assume that the news is good and correct (something which one can only tentatively establish from private letters), that the reports come at the right time, and that they announce the happy arrival of the ships, nevertheless an untoward event occurring subsequent to the acquisition of the news, but before the conclusion of the business may destroy this splendour and contentment. For ships can sink inside a harbour and hopes be thwarted. Continue reading →