Old Stock Reports
This is a collection of company stock reports that I wrote many years ago. There are stored here purely for nostalgia purposes. Any info below is extremely outdated. This reports were not updated during the 7+ years that I did not run the GARPInvestor. Several of these companies may no longer be around.
Aether Systems: Wireless Data King
by Chris Connor
Irrational Exuberance Over a Wireless Superstar
Aether Systems {AETH} is a perfect example of a stock with a substantial amount of potential that got way ahead of itself. In March of 2000, demand was so high for the stock that it hit $345 per share (a market cap of over $13 billion) with little in the way of revenues. The irrational exuberance stemmed from interest in the wireless Internet. AETH figured to play a prominent role because of its massive war chest ($729.9 million in cash), complete range of wireless solutions (software, hardware, wireless Internet connectivity, application design and hosting), compatibility with whichever next generation wireless platform becomes adopted as the de facto standard, and a customer list that included Merrill Lynch {MER}, Charles Schwab {SCH}, Office Depot {ODP}, Staples {SPLS}, and J.P. Morgan Chase {JPM}. In addition to its impressive customer list, AETH caught the attention of investors because of the ability to provide customers with the option either outsourcing their entire wireless network or building one in-house.
Times Have Changed
Once considered to be one of the top pure wireless plays when the industry was red hot on Wall Street, AETH now sells at a considerable discount to its cash level and book value. In fact, the company still boasts one of the largest war chests in the entire wireless industry. Although the AETH will need the bulk of its cash position to stay afloat in the uncertain wireless industry, it’s financial strength allows it to assume the role of a vulture that can pick through the bones of wireless data companies that will not be able to survive. If wireless data ever realizes its immense promise, look for Aether to lead the pack.
Akamai: The Top Content Mailman on the Internet
by Chris Connor
Early Market Leader
Akamai {AKAM} is the world’s leading Content Delivery Service Provider (CDSP) with a network of 9,700 servers spread across 56 countries that delivers video, audio, and streaming events to end-users utilizing the fastest path possible. The company’s proprietary technology (algorithms) also the high-speed delivery by finding the server that is closest to the user requesting the information. Akamai’s proprietary algorithms monitor Internet traffic patterns to discover the most efficient path possible. Investor’s should note that Akamai’s technology is well protected because the company already holds 5 patents on its technology. Simply put, Akamai’s vast network of servers and proprietary technology significantly improve the speed and reliability of web sites by eliminating bottlenecks and site crashes. In late 1999 to early 2000, WallStreet sensed the enormous potential of such a network and bid AKAM up to mammoth proportions. Believe it or not, but this company was once valued at $37.3 billion, and that is not a typo.
Recurring Contacts
The most attractive aspect of Akamai’s business is that a large percentage of the company’s customers have signed recurring contracts. Unlike selling hardware, Akamai’s FreeFlow service allows the company to get paid by the amount of megabytes that it delivers instead of shipping a product just once. Thus, the company gets paid for how much content it delivers in a month. Customers must pay a minimum usage fee over the term of the contract and they are charged extra for usage above the minimum usage level.
Looking Forward
Along with Exodus {EXDS}, the leading web-hosting provider, Akamai is one of the premier Internet infrastructure service providers in the world; however, Akamai has substantially less debt than Exodus, which has a huge debt load, and has established more barriers to entry than Exodus has. Obviously, there are less barriers to entry for web-hosting since several major companies such as Intel {INTC} and IBM {IBM}, both of which are partners of Akamai, are now offering web hosting services. In contrast, it would be much harder for a company to replicate Akamai’s extensive network of 9,700 servers and proprietary technology. With that army of servers, look for Akamai to continue its reign as the top transport vehicle for the explosive streaming media industry.
Akamai’s current leadership comes in part from its delivery of such high-profile streaming media events as the 2000 MTV Video Music Awards, the British Open Golf Tournament, the Emmy Awards, and the presidential election coverage for CNN. Though Cisco {CSCO} and Inktomi {INKT} announced in August that they will offer competing networks, AKAM should continue to dominate the industry because of its proprietary technology, the fact that its network is already in place, and its numerous partners and customers that include CNN, Mercury Interactive {MERQ}, CacheFlow {CFLO}, CMGI {CMGI}, Novell {NOVL}, Digex {DIGX}, Real Networks {RNWK}, Microsoft {MSFT}, America Online {AOL}, Intel, and IBM.
If Akamai does hold on its to its sizable lead in content delivery services, streaming media should develop into a cash cow for Akamai as the company will be able to maintain a revenue growth rate in excess of 50 percent annually over the next two to three years. In other words, don’t be surprised if AKAM becomes a Wall Street darling again.
Applied Micro Circuits: Fiber Optic Leader
by Chris Connor
Don’t Count Out Fiber Optics
Economic slowdown or not, fiber optics is not going to disappear into a puff of smoke. Sure telecommunications spending will be curtailed for the intermediate future, but investors need to look at the big picture when it comes to fiber optics. The technology is the ultimate transportation vehicle of the broadband industry and the pervasiveness of the Internet will continually push the need for ever faster data connections.
Among the companies that have been punished within this sector, but still possess the potential for tremendous upside over the long-term is Applied Micro Circuits {AMCC}. The company provides silicon solutions to power the world’s optical networks. AMCC’s primary competitive advantage is in its germanium chips, which can operate at higher frequencies than regular silicon and at lower power levels than ultra-high speed gallium arsenide integrated circuits. These chips appear in products from high-profile customers such as Nortel {NT} (its largest customer), Cisco {CSCO}, JDS Uniphase {JDSU}, 3Com {COMS}, Alcatel {ALA}, and Lucent {LU}. Although these blue-chip technology customers previously helped AMCC’s revenues and market cap to price soar into rarefied air (annual sales of over $400 million and a market value over $30 billion at one time), these same customers have also caused AMCC to plunge, due to the tough economic environment.
Looking Forward
As mentioned earlier, Applied Micro Circuits is positioned to continue as a leading chip supplier to the fiber optics industry due to its innovations with an ascendant semiconductor material such as silicon germanium and the market leadership of its customers. Furthermore, Applied Micro Circuit’s fiscal strength may allow it to pick up market share from weaker competitors who might not survive these tough times. The company has been profitable for four consecutive years (excluding one-time charges), has approximately $1 billion in cash, and has a customer list that is hurting but is in no real danger of going under. Although AMCC continues command quite a premium (12 times sales), investors may want to consider researching the stock further because Applied Micro Circuits is likely to shine again once the economy recovers because of its powerful market position in the ascendant fiber optics industry.
Avanex: Feel the Power of the PowerMux
by Chris Connor
Jewel in the Eye of a Technology Guru
Those investors who are familiar with George Gilder’s Technology Report have undoubtedly came across a fiber optic company called Avanex {AVNX}. Gilder has been so impressed with the company that he has added it to his vaunted Telecosm Table and written a feature about AVNX in his latest book, The Telecosm. Avanex has attracted the glowing sentiments of this widely-known technology guru because of its star product, the PowerMux.
PowerMux
The PowerMux is a DWDM multiplexer-demultiplexer that allows customers to use more bandwidth than they could with similar equipment from competing DWDM companies. This advantage is realized through the PowerMux’s ability to process any number of optical signals at any channel spacing and at any bit rate. This vital ability enables users to constantly upgrade their networks to satisfy ever-increasing bandwidth needs. In contrast, competing products are less focused on network expandability than they are with the capacity of individual optical fibers. With such a key advantage resting on Avanex’s shoulders, it is no wonder that the company became a Wall Street darling.
Not Immune from Tech Bear Market
Get off the phone with your broker! Avanex has revealed serious chinks in its armor, since it has warned of weaker than expected results three times this year. Continued weakness at fallen telecom angel Worldcom {WCOM} appears to be one of the primary culprits behind the upheaval of AVNX’s seemingly unstoppable growth trend in 2000. How can one customer have such a significant impact on a fast grower like Avanex? The answer to that question is also the company’s biggest risk going forward: Worldcom accounts for around half of Avanex’s revenues. This level of concentration must reduced substantially if AVNX is to realize its enormous potential over the long term. Being so dependant on a deadweight like Worldcom will keep this tech superstar grounded. If Avanex can expand its customer base, the potential for the company to resume its torrid growth and develop into a Wall Street darling again, certainly exists.
BEA Systems: The King of E-commerce Infrastructure
by Chris Connor
De Facto Platform
Without question, BEA Systems {BEAS} is among the software elite. While Oracle {ORCL} leads in database software and Siebel Systems {SEBL} leads in CRM software, BEAS has become the de facto platform for building e-commerce because it dominates application server software. Application server software links front-end applications with back-end systems. In other words, application server software is the link between the sales on an e-commerce site and that company’s database. According to research firm IDC, the application server market should grow 62 percent a year to $11.3 billion by 2004.
A telling sign of BEA’s success in this crucial and explosive software market is that it keeps adding customers from diverse industries such as banking, airlines, manufacturing, retail, communications, securities trading, utilities, and even online-gaming at an astounding pace. Over the course of the company’s first quarter of 2002, the company added a whopping 700 customers including the likes of Applied Materials {AMAT}, Verizon {VZ}, Network Associates {NETA}, Solectron {SLR}, and United Parcel Service {UPS}. In total, the company has over 10,000 customers and the overall diversity of its customer base is one of the key reasons that BEAS has been able to zig while most other companies have been zagging.
A Bright Spot in Dark Times
As doom and gloom permeates the air around Wall Street due to the weak economy and a plethora of company issuing earnings warnings, BEA Systems actually RAISED its earnings outlook. On May 15th, the company upped its earnings outlook for fiscal 2002 to the $.41 to $.43 per share range, two cents above prior estimates. While not raising revenue guidance as well for fiscal 2002, BEAS increased its earnings guidance because the company’s higher-margin software licensing business is rising as a percentage of revenues at the same time its lower-margin consulting business is falling. Moreover, BEA’s latest reported quarter, ended April 30, continued the company’s impressive string of 22 consecutive quarters of record revenues. Keep in mind that only elite companies like Microsoft {MSFT} and Oracle have been able to boasts of similar streaks in their storied histories. In fact, BEA Systems resembles MSFT (even though it is not nearly as dominant as Microsoft) since application server software acts similar to an operating system for e-business.
Future at a Crossroads
Despite the fact that BEAS provides the de facto platform for building e-commerce on and has been able to continue to shine in tough times, there are still doubts about the company’s long-term future. Simply put, BEAS must soon make a decision that will define its long term direction because the company’s rapid growth during tough times is like blood in the water to a bunch of sharks. Either BEAS can continue to devote the lion’s share of its attention to its core application server market and risk its market being eventually eaten away by technology giants such as IBM {IBM} (second in application server software), Sun Microsystems {SUNW}, and Hewlett-Packard {HWP} or it can diversify its business to encompass more of the application side and offer a more complete package to customers. If BEA chooses to play it safe and decides to focus strictly on its core market, it will likely continue its streak of record revenues for at least a few more quarters; however, there is a great possibility that either IBM, SUNW, or HWP will be able to surpass BEAS because they are able to bundle their application server software with their hardware. In addition, both MSFT and ORCL want a larger piece of the application server pie.
The significantly riskier path for BEA is to branch out more into the front-end side of e-business and compete with Art Technology {ARTG}, Vignette {VIGN}, Blue Martini {BLUE} and BroadVision {BVSN}. This way, BEAS would have more to bring to the table against its rivals while offering more value to its customers at the same time; however, the danger is such a move would create friction with a number of BEAS’ customers and partners, including BroadVision, who have front-end applications of their own. Even though neither plan is without its share of risks, BEAS needs to pick one and stick with it to maximize that plan’s effectiveness. One indication that the company could be leaning toward the latter path is the recent announcement it will offer customers an enterprise portal solution (allows companies to set up e-business portals for customers, employees, partners, and suppliers) along with its market-leading application server software. If the company is able to sustain its market lead over the next couple of years with its profit margins intact, BEA Systems could very well evolve into the Microsoft of e-business.
Don’t Get Drunk On Blue Martini Yet
by Chris Connor
Intriguing Brand
Blue Martini {BLUE}. What a name for an e-commerce software maker! Although the name Blue Martini does not exactly fit with what the company does, it certainly screams for attention. In fact, the name has screamed for so much attention that Brandweek Magazine recently awarded Blue Martini Software’s CEO, Monte Zweben, the title of “the Marketer of the Next Generation”. Though the award may be a great honor, it sheds little light on what the company actually does.
BLUE provides software that allows companies to interact across multiple platforms such as Web sites, email, call-centers, wireless devices, and on-line trading exchanges with their customers and partners. By having the ability to interact with customers over various platforms, companies are able to gather info on and target specific content to customers. In contrast to legacy customer relationship management (CRM) systems, Blue Martini’s systems are easy to deploy (usually around 8 to 14 weeks) and are flexible so that companies can change their e-commerce strategies when the market dictates it, which is a must in this world of ever-changing technology.
Massive Hangover
Not surprisingly, Blue Martini’s stock price has experienced quite a hangover after partying with a highly successful IPO. The stock jumped 174% to $54.78 in its first day of trading (priced at $20), July 25th of last year. As can be seen by the chart below, this former high flyer can now be classified as penny stock. The stock has been taken out and shot because BLUE’s business model has been victimized by the fact that companies have been suspending major software projects because of fears about the economy. Most other software companies have also faced this serious problem, but Blue Martini’s comparatively small client base has intensified the problem, because it lacks the revenue source diversification that larger software companies have.
Looking Forward
In some way, shape or form, e-commerce will eventually be a major driver of the economy even though it has a black eye on Wall Street right now. Given that the role of the company with this quirky brand name is to make e-commerce as effective as possible, it is poised to benefit from an economic recovery. For example, BLUE is partnering with the two leaders of B2B commerce, Ariba {ARBA} and Commerce One {CMRC}, to extend the supply chain for online marketplaces by providing catalog management applications that that enables suppliers to market themselves on online exchanges. Blue Martini is also actively looking to expand its customer base and has its eyes set on Japan and Europe for future expansion possibilities so it can reel in more multinational companies like Levi Strauss.
The short-term key, however, will be the ability of BLUE to withstand the current economic storm. Looking at its balance sheet, it appears that Blue Martini has enough cash to stay in business until it turns profitable. If this holds true and the company amasses a substantially larger and more spread-out customer list, Blue Martini may once again thrive on Wall Street.
Will CacheFlow Ever Generate Cash Flow?
by Chris Connor
Speeding up the World Wide Wait
There is nothing that a Web surfer hates more than requesting a Web page and then having to stare at a blank screen for a minute or more. Internet caching deals with this problem because it stores frequently accessed data closer to Web surfers (on the edge of the network) than an originating server does, which speeds up a Web site’s response time and nearly eliminates the blank screen problem altogether. So which companies are providing Internet caching products to eliminate the world wide wait? The list of companies involved in the Internet caching business reads like a who’s who of technology giants, including Network Appliance {NTAP}, Cisco {CSCO}, Inktomi {INKT}, and Novell {NOVL}. However, the current leader, CacheFlow {CFLO} is undoubtedly less well-known to investors than those aforementioned companies. CacheFlow was founded by the same guy (Michael Malcolm) who co-founded network attached storage (NAS) leader Network Appliance. Mr. Malcolm, who holds several network caching patents, has recently announced his intent to leave CacheFlow to found yet another Internet infrastructure company, but CacheFlow appears to be headed in the right direction after passing Network Appliance for the lead in the lucrative Internet caching market.
Not a One-Trick Pony
CacheFlow leads the Internet caching market primarily because it has a broad product line that best utilizes the infrastructure-friendliness of Internet caching. While corporations and Internet service providers place the company’s Client Accelerators at the edge of networks in order to reduce response times and save bandwidth, CacheFlow’s Server Accelerators are deployed near giant Web server farms to improve the performance and scalability of the servers. The Server Accelerators are particularly interesting because they can boost the amount of content that existing server infrastructure can serve by five to ten times. In addition, Server Accelerators lessen server response time by an incredible 50 to 80 percent. By maximizing existing server infrastructure, Server Accelerators keep CacheFlow’s customers from having to purchase additional unneeded servers. According to Jupiter Communications, the streaming content delivery market will be valued at $6 billion (based on sales) by 2004.
Looking Forward
According to Jupiter Communications, the streaming content delivery market will be valued at $6 billion (based on sales) by 2004 and CacheFlow aims to take a major piece of that lucrative pie. Towards that goal, CasheFlow acquired privately-held Entera for $440 million. The deal makes sense for CacheFlow from a strategic perspective because Entera gives CacheFlow a complete streaming media product offering, but it puts a question mark on the future of the company’s immediate earnings at a tough time for Internet infrastructure stocks. Over the longer term, however, look for CacheFlow to be one of the dominant providers of Internet infrastructure.
Terabeam Partnership Puts Sorrento Network’s on Wall Street’s Radar Screen
by Chris Connor
The Announcement
On May 22, Sorrento Networks {FIBR} took a very important step in its history when the company announced that it would partner with Terabeam to substantially expand the bandwidth capacity of Terabeam’s free-space backbone network (via Sorrento’s GigaMux DWDM system). Terabeam combines the bandwidth capabilities of light and the transport dynamics of air (i.e. avoid digging up streets to lay fiber optic cable) to form an extremely powerful broadband solution with its Fiberless Optics technology. Investors have been itching to own a piece of Terabeam ever since technology guru George Gilder mentioned it his self-named Technology Report over a year ago. The company is still private, but now investors have a chance to own one of its partners with Sorrento Networks. Furthermore, this partnership with Terabeam will likely have a greater effect on Sorrento’s operating results than it would a larger company like Lucent {LU}. Wall Street showed its glowing approval of the partnership by bidding up FIBR 36 percent from the previous day’s close.
Misleading Revenue Numbers
At first glance, it appears that Sorrento’s revenues are in bad shape; however, a closer look shows that Sorrento’s revenues (taking out the lagging sales of its Meret Optical subsidiary) are clicking right along after having shed NetSilicon and Entrada Networks from its operating results. The confusion over Sorrento’s revenues stems from the fact that both NetSilicon and Entrada Networks were spun-off and Sorrento no longer reports their results. That said, Sorrento (the subsidiary) has reported revenues of $3.6 million, $7.1 million, and $11.1 million over the last three quarters respectively. Moreover, the company recently announced that its Sorrento subsidiary had reported revenues for its latest quarter of $13.1 million. Although that revenue number is down from an expected $16 million, it results in average sequential growth for the Sorrento subsidiary of about 57 percent per quarter during the past three quarters. In other words, the Sorrento subsidiary of FIBR is the far and away the crown jewel of the company.
All Blue Skies From Here?
Not Quite. Although the company’s flagship subsidiary is generating rapid revenue growth and the Terabeam partnership demonstrates that Sorrento is becoming a force to be reckoned with in the DWDM metro market, the crown jewel of the company is still bleeding cash and is a long way from profitability. Excluding deferred and other stock compensation, the Sorrento subsidiary lost $32.3 million on only $26.5 million in revenues for fiscal 2001. No matter how great Sorrento’s technology is, the company cannot keep losing more money than it generates in sales without eventually going out of business. Even the most bullish and vocal FIBR shareholders cannot possibly deny that!
As far as cash is concerned, the company burned through $4.36 per share in cash for its fiscal 2001 from normal operations. Even though Entrada Networks did contribute to that negative cash flow for part of the year, the major culprit here is the rapidly growing Sorrento subsidiary. Surprisingly, the lagging Merit Optical subsidiary actually has reported positive operating cash flow, so nearly the full blame for the high cash burn rate must fall on the Sorrento subsidiary. In addition, it is taking longer for the company to collect its accounts receivables. From Q2 FY01 to its Q1 FY02, the time it takes for the company to collect on money owed to them from customers has increased from 86 days all the way to 125 days. Though the company reports no payment problems, the dramatically slowing receivable turnover should be watched carefully by any potential FIBR investor, because it could lead to serious problems going forward.
With these glaring inefficiencies, it is no wonder that stock has not been able to outperform the Nasdaq in five years (see chart below). Yes, the Terabeam announcement is a major positive for the company going forward, but the company needs to drastically improve its financials if it wants to be a true major player in the fiber optics industry. On that note, Sorrento’s management announced in a conference call today that it has made impressive progress in cutting costs for its latest quarter. In fact, FIBR substantially decreased its operating losses because of the combination of cost cutting and continued rapid revenue growth on a sequential basis.
Although the company still has a long way to go with its financials, it appears that management has recognized that fact and it appears that they are putting the company on the right track. With that being said, it appears that FIBR offers speculative potential to aggressive investors who are willing to wait while the company’s management attempts to iron out the company’s many financial kinks. If FIBR is able to turn a profit in the near future, its DWDM technology is strong enough in the explosive metro market to catapult the company into elite status in the fiber optics industry. For example, management on the conference call said that Sorrento can do with one strand of fiber what its competitors can do with two. That type of performance advantage should not be underestimated.
Finisar: Fiber Optic Firecracker
by Chris Connor
In the Right Markets
Almost every single individual investor has heard of the impact that fiber optic stocks have had on Wall Street over the last year, but they may not have heard of a highflying fiber optic company called Finisar {FNSR}. With such high-profile customers as EMC {EMC}, Newbridge Networks, IBM {IBM}, Sun Microsystems {SUNW}, Emulex {EMLX}, Extreme Network {EXTR}, and Brocade {BRCD}, Finisar definitely deserves some attention from investors. The company specializes in fiber optic subsystems and test equipment for the storage area network (SANs) and local area network (LAN) markets. FNSR’s fiber optic subsystems consist primarily of receivers (convert incoming optical signals into electric signals), transmitters (convert electric signals into optic signals), and transceivers (a combination of a transmitter and a receiver) based on the Fibre Channel and Gigabit Ethernet protocols. Fibre Channel is currently the primary technology for SANs while Gigabit Ethernet is developing into the top LAN standard. It should be noted that there are several storage industry insiders that believe Gigabit Ethernet (or the versions of Ethernet that follow) will ultimately replace Fibre Channel as the backbone of SANs, so Finisar should have its bases covered if that does happen.
In a Class By Itself
Unlike other fiber optic companies, Finisar serves enterprises instead of telecom service providers. In other words, Finisar’s products are used for corporate intranets, whose equipment is usually kept in one building, while fiber optic products from the likes of JDS Uniphase {JDSU} are used in networks that stretch across continents and oceans. This difference has allowed Finisar to avoid the financial impact caused by the reduced telecom spending that has adversely affected the likes of Nortel {NT}. In contrast, FNSR is boosted by the continuing fortunes of its three biggest customers (EMC, BRCD, and EMLX) which make up about 50 percent of Finisar’s sales and are benefiting from the still-explosive storage industry.
Looking Forward
Besides the obvious enormous potential of the storage industry, Finisar also should benefit from its broadband cable Digital Return Path Link product. This product allows cable operators to offer two-way Internet access without the noise problems that are usually present over fiber optic lines using analog signals (analog signals are vulnerable to noises from various sources which hinder bandwidth). Moreover, Finisar has been extremely adept at using its market leading Fibre Channel and Gigabit Ethernet test equipment to garner business for its fiber optic sub-systems because Finisar is intimately aware of the progress of its customer’s product development so it can get the jump on its competitors by developing products to satisfy its customer’s needs as soon as those needs arise. With that being said, investors should definitely research Finisar further if they are looking for substantial stock price appreciation from a fiber optic stock without the risk of reduced telecom spending.
The Next Communication Chip Marvel
by Chris Connor
Broadband and Storage
Although it is not as well known as communication chip makers Broadcom {BRCM}, PMC Sierra {PMCS}, Conexant {CNXT}, Vitesse {VTSS}, and LSI Logic {LSI}, Marvell Technology {MRVL} has turned a few heads on Wall Street with its explosive growth, “extreme broadband” chips, and high-speed storage chips. The company’s broadband products primarily target the Gigabit Ethernet (the pervasive Local Area Network standard) market while the company’s storage products focus on an area of technology known as “read channels”. Read channels convert analog data from a magnetic disk into digital data for processing. In a nutshell, Marvell’s broadband and storage chips substantially increase data transmission rates over existing infrastructures (i.e. copper phone lines), which saves customers time and money as they do not need to install new infrastructure (i.e. fiber optics) in order to improve the performance of their networks.
Integrating Digital and Analog Signal Processing on One Chip
Marvell’s chips are able to provide the crucial function of improving the performance of existing infrastructure because they provide the key interface between analog and digital signals based on the company’s proprietary Communications Mixed-Signal Processing (CMSP) technology. The speeds that Marvell’s chips can achieve on ordinary twisted pair copper wires (speeds above both gigabit per second and GigaHertz) really set its technology apart from that of its competitors. For example, Marvell recently announced the first ever mixed-signal read channel chip (HighPHY) that achieves speeds above one GigaHertz. Nevertheless, keep in mind that, although Marvell’s products improve the performance of copper phone lines exponentially, copper phone lines will never be able to surpass optical fiber in terms of broadband capacity.
According to the company, its products also utilize specialized DSP (digital signal processing) algorithms and specialized DSP engines that can execute those algorithms in real time. The company then takes all of these technologies and integrates them onto a single chip based on CMOS (complementary metal-oxide semiconductor), in a similar fashion to Broadcom’s technology fabrication model. CMOS is a semiconductor technology that utilizes transistors to form a current gate that facilitates effective electrical control, which means that almost no power is used in the chip when it is not needed. Besides lowering the power requirements of chips, CMOS enables semiconductor makers to integrate hundreds of components on a single chip. On the other hand, semiconductor technologies such as gallium arsenide and silicon germanium are much harder to implement and, therefore, only increase cost and complexity.
Looking Forward
In order for Marvell to continue to be a marvel in the communication chip industry, it will have to substantially diversify its customer base. A staggering 98 percent of the company’s fiscal 2000 sales were attributable to only five customers: Seagate, Samsung, Hitachi, Fujitsu, and Toshiba. Guess how that problem gots solved quickly. Yes, the recent Galileo acquisition will broaden Marvell’s customer base considerably by adding numerous new customers such as Cisco {CSCO}, Hewlett-Packard {HWP}, Lucent {LU}, and Nortel {NT}. Besides bringing in new customers, the acquisition also thrusts Marvell into a leadership role in providing chipsets to the all-important Gigabit Ethernet standard because the company will be able to offer complete chipset solutions that provide speeds above one gigabit over copper. Gigabit Ethernet is found primarily on optical fiber (which is very costly to install) because these kinds of transmissions could previously be carried only short distances over copper phone lines due to the fact that copper lines were originally designed for data rates of only 100 Mb/s and lower. With Marvell able to attain speeds higher than one GB/s on copper wire, Gigabit Ethernet over copper becomes a reality. Marvell has also introduced a transceiver that performs the interesting task of bridging the gap between copper-based LANs and fiber-based WANs (wide area networks like the Internet) at speeds above one gigabit per second. In this time of fear regarding the slowing down of spending on communications infrastructure, Marvell appears to have the perfect solution to this problem: speed up the most prevalent communication infrastructure in the world, copper phone lines.
Metromedia Fiber: Metro Area Network Powerhouse
by Chris Connor
Bandwidth Bandwidth Bandwidth
Metromedia Fiber Network {MFNX} is a leader in the deployment of optical IP Internet infrastructure within large metropolitan areas. In short, Metromedia provides the infrastructure that allows companies to connect to remote offices, Internet data centers, telecommunication central offices, and carrier hotels to access such services as local and long-distance voice, email, ultra-fast Internet browsing, and remote storage management. The company intends to deploy a mesmerizing 3.6 million fiber miles of fiber-optic infrastructure by 2004. Already, the company has about 1.7 million fiber miles deployed. In fact, the company’s fiber capacity grew 19 percent on a quarter-to-quarter basis. What does Metromedia intend to do with all this bandwidth? Metromedia wants to breakdown all bandwidth barriers for metro areas by offering essentially unlimited bandwidth capacity at a fixed cost instead of going by the amount of capacity that is used.
Bad Connections
Although Metromedia has been quite adept at expanding its customer list to include such diverse major companies as Electronic Arts {ERTS}, Verizon {VZ}, America Online {AOL}, and Sun Microsystems {SUNW}, Metromedia also has strong ties with struggling telecommunications companies that are in trouble of going out of business. For example, Winstar Communications {WCIEQ} agreed to purchase $300 million worth of dark fiber from Metromedia over a 25 year period and supply Metromedia’s AboveNet division with long-haul backbone services, but Winstar recently filed for bankruptcy on April 18. In other words, Winstar has left Metromedia completely in the lurch. That said, the biggest risk with Metromedia is that it will suffer as its weaker partners and customers begin to drop off like flies, so investors need to take a long look at the complete telecommunications industry when researching Metromedia for a possible investment. Metromedia may be generating excellent sales growth now, but it obviously does not live on an island by itself because the misfortunes of weaker companies could limit the upside potential of this Internet infrastructure powerhouse.
Looking Forward
An Internet infrastructure powerhouse trading below $2 should attract aggressive investors to the stock even though the company is awash in red ink (losses only). Given the distinct possibility that more telecommunication companies will fail like Winstar, those valuation measurements only add risk to Metromedia’s stock. However, investors should not ignore Metromedia for the long term because the company is funded well enough to meet its goal of deploying 3.6 million fiber miles of fiber-optic infrastructure by 2004 and the company should be one of the big kuhunas of Internet infrastructure in the explosive metro optical networking (MON) industry for years to come.
Could the Xbox Make Nvidia the Next Intel?
by Chris Connor
Graphics Chip Gaining Importance
Anybody who has played or seen a recently released game on a PC probably has marveled at the improving graphics of today’s latest games. Behind these vastly improving graphics in today’s computer and video games is something called a graphics chip. A graphics chip accelerates the displaying of images on a monitor to achieve spectacular graphical effects. Nvidia {NVDA} is the world’s leading graphics chip maker - its graphics chips are found in 48 percent of all desktop PCs (according to Mercury Research). In fact, Nvidia’s desktop market share has more than doubled over the last year, surpassing that of former market share leader ATI Technologies {ATYT}.
Surpassing the Competition
Nvidia has witnessed such a swift ascent and has won former ATI customers like Gateway {GTW} and Compaq {CPQ} because it has proven itself adept at improving its chips every six months. The other big name in graphics chips, 3Dfx Interactive {TDFX}, made the fatal mistake of trying to go vertical by purchasing a graphics board (an add-on to PCs) maker a few years ago and has self-destructed since that time. With that acquisition, 3Dfx entered a lower margin business and alienated other graphics board makers, which were 3Dfx’s biggest customers. On the other hand, Nvidia stayed nimble and picked up many of the customers that 3Dfx lost. Furthermore, Nvidia has bought now swallowed up all of the assets of the soon-to-be extinct 3Dfx. Now, Nvidia has conquered the desktop market and is casting its eye on the lucrative laptop market.
That said, look for Nvidia to make a big splash in both the laptop and console markets, which should fuel the company’s growth for the next several years as the desktop PC market continues to decline. For the laptop market, the company is introducing the mobile industry’s first-ever graphic processing unit (GPU), called the GeForce2. Nvidia says that its GeForce2 enables performance capabilities similar to those of a desktop PC by providing much faster and higher quality graphics than are currently available on laptop computers. The company also claims that GeForce2 is ten times faster than the mainstream chips that perform the graphics acceleration function in laptop computers today.
Will the Xbox be a Hit?
As far as consoles are concerned, Nvidia is working on graphics chips for Microsoft’s {MSFT} highly anticipated console, called the XBox, that is expected to hit market in fall of 2001. Nvidia is one of the reasons the Xbox will enjoy a sizable lead in terms of performance over the other next generation consoles. If the Xbox is a huge success, Nvidia could turn out to be the Intel of consoles with a stock price that could soar into the stratosphere.
Storage Networks: Leading the Outsourced Storage Revolution
by Chris Connor
Early SSP Leader
If the storage industry was a classroom and the teacher asked the question “Who wants to store data for companies instead of just selling them storage hardware?”, Storage Networks {STOR} would raise its hand and shout “pick me, pick me!”. STOR is the leading storage service provider (SSP) because it has taken the initiative to build a global network (primarily fiber-optic) devoted to storing other companies’ data. By building this global network, the company’s customers can simply plug their computer systems into the network to store and access all of their data. In fact, Storage Network’s approach to storage is not unlike the way that most phone companies operate their businesses; the company charges customers based on the usage of its network.
Benefits of Using a SSP
Why would a company want to outsource its storage to a SSP? For one thing, the management of storage is becoming more and more complex as new architectures such as storage area networks (SANs), network attached storage (NAS), and Infiniband become more prevalent. The management of storage is also becoming more complex as companies continue to add storage capacity at a rapid pace due to the overwhelming amount of data created by the Internet and corporate intranets. Furthermore, a SSP takes a load off a company’s IT staff (there is currently a shortage of IT personnel in the workplace), who might not be familiar with the intricacies of managing storage systems. By outsourcing storage to a SSP, IT departments are then free to concentrate on revenue-generating activities.
Competitive Advantages
Why can’t other companies pursue a similar strategy to Storage Network’s? Well, that is what is happening because the idea of outsourcing storage has definitely caught on as fellow Infrastructure service providers such as Exodus {EXDS} and Akamai {AKAM} have thrown their hats into the SSP ring; however, STOR has a few advantages that should allow the company to stay in the forefront of the industry. One such proprietary offering is its Virtual Storage Portal software that allows customers to monitor and manage their stored data 24×7 through a simple web browser. Other advantages the fact that a large percentage of its network is already in place and the impressive customer list, which includes Yahoo {YHOO}, Lycos {TRLY}, Best Buy {BBY}, Playboy {PLA}, and Merrill Lynch {MER}.
Looking Forward
With little doubt, managing storage resources will continue to grow increasingly complex for the foreseeable future, which will serve to catapult SSPs to the forefront of the storage industry. In other words, a majority of companies will likely prefer to outsource their storage needs instead of keeping them in-house. The question is, however, how long can Storage Networks continue to ride on top of this dynamic industry. Given STOR’s proprietary software and fiber optic network, the company should stay at the top or at least near the top, but that is not to say that large storage hardware and software companies will not attempt to oust Storage Networks from the top spot. The bottom line is that the SSP is a very attractive market that will eventually be highly competitive.
Looking into Tivo
by Chris Connor
Taking Control of the TV
Ever heard of Tivo {TIVO}? Apparently, at least 200,000 people have. This is the number of subscribers that Tivo has for its personal video recorder (PVR) service.
In a nutshell, a PVR acts something like a PC in order for users to fully customize their TV experience. Users can record every episode of a certain sitcom or pause live sporting events on cable or satellite TV. Tivo’s service should be attractive to cable providers since Tivo gives them a better indication of what viewers prefer since viewers choose exactly what that they want to watch, when they want to watch. Another important feature of the service is that there is no longer a need for a huge library of videotapes because the shows are stored inside the PVR. Users can even have Tivo automatically tape all the movies of certain actor. For example, Jackie Chan fans can have Tivo scan for any old or new Jackie Chan movies that come on TV. That kind of a feature should catch the eye of consumers who want to have the same kind of interactivity with their TVs that they have with the Internet.
Gaining Recognition on Wall Street
Last week, Tivo caught the attention of Wall Street as its shares soared an astounding 72 percent in one day. The huge price spike was to due to the company being awarded a patent for a large portion of the technology dealing with PVRs. With that patent, which is entitled Multimedia Timewarping System, Tivo should be able to lessen its dependence on subscriptions because the ability to rake in additional revenue from licensing its technologies to cable providers and any potential PVR competitors.
This is not to say that subscription revenue is not important, because Tivo has been rapidly ramping up subscriber growth. During Q1 FY02, which ended April 30, 2001, the company added 35,000 new subscribers to its Tivo service. Moreover, the company has more than doubled its subscriber base over the past five months.
Operating Results Beginning to Pick Up Steam
Due to the substantial increase in the number of subscriber’s to Tivo’s service, the company is finally showing progress with its operating results. In its latest quarter, Tivo generated sequential revenue growth of 48 percent and annual revenue growth of about 540 percent. Keep in mind, however, that the company has only been taking on subscribers for its service since March 31,1999 and this has resulted in the growth appearing to be so enormous. Still, it should be encouraging for investors to see Tivo’s trailblazing service grow rapidly given the lukewarm response for Web TV (Internet access via the TV). In an attempt to curb Wall Street’s fears over its cash burn rate, Tivo has also undertaken a new operating plan (job cuts) that is intended to decrease its cash needs and speed up its pursuit of profitability. The cost reductions should definitely lend more creditability to Tivo’s business model since the company is losing nearly 16 times the amount of money that it generates in revenues per quarter (going by the most previous quarter).
Looking Forward
Forrester Research predicts that 14 million households will use PVRs by 2004. If that prediction even comes close to occurring, Tivo could very well transform into a technology powerhouse since it has tied the bulk of PVR technology up with patents; however, with so many larger rivals wanting to ride the rising PVR wave, Tivo may likely get acquired if the PVR does become mainstream. In fact, SonicBlue {SBLU} acquired one of Tivo’s biggest rivals, ReplayTV, after ReplayTV decided to stop selling set top boxes and focus on licensing its software. Who would most likely be interested in Tivo? Probably industry leaders such as AOL Time Warner {AOL} or Microsoft {MSFT}. AOL has already invested $200 million in Tivo and will use Tivo as a major feature for its AOL TV, while Microsoft could be interested in Tivo for competitive reasons. Microsoft’s Ultimate TV system is used for satellite television and it could be in violation of Tivo’s latest patent. If it is in violation of the patent, and Forrester Research’s prediction is a distinct possibility, it may be in Microsoft’s best interest to go ahead and purchase Tivo instead of paying license fees.
Transmeta: Going the Low Power Route
by Chris Connor
A Hyped Technology Makes for a Hyped IPO
The story of tiny chipmaker Transmeta {TMTA} taking on semiconductor behemoth Intel {INTC} has been billed as a modern day version of David versus Goliath. TMTA was pitted against the mighty INTC because of Transmeta’s supposedly revolutionary technology that allows its chips to consume significantly less power - a huge benefit to devices like laptop computers. Additionally, investors were also attracted by the fact that Linus Torvalds, the creator of Linux (the arch rival to the windows operating system), was Transmeta’s lead software engineer. Combined these two factors propelled the company’s IPO to an incredible first-day gain of 115.48 percent last fall. This performance was impressive because it occurred in weak IPO market conditions (the IPO market has yet to recover from the carnage in the equity markets).
Cutting through the hype, Transmeta’s Crusoe chip does consume significantly less power than rival chips because the Crusoe is powered primarily by software (which means less transistors) instead of silicon. This power savings, however, apparently comes at sacrifice of speed - both the INTC’s Pentium and Advanced Micro Devices’ {AMD} Athlon are significantly faster. There has been speculation within the industry that if the Crusoe tried to match the speed of the Pentium and the Athlon, it would not consume less power than those two chips. Simply put, Transmeta’s technology is not a revolution but a trade-off of speed for less power consumption. When Transmeta’s chips can match the speed of Intel’s and AMD’s chips and still consume significantly less power, Transmeta will then have revolutionary technology. Until then, it is still interesting to see how the company is progressing during its infancy.
Product Revenues Starting to Stream In
Although Transmeta was strictly a research and development company prior to June 30,2000, the company did generate significant revenues through license agreements with IBM {IBM} and Toshiba. In 1998 and 1999, TMTA generated license revenues of $28 million and $5 million respectively. The company lessened its overwhelming dependence on license revenue last September when Sony {SNE} included a Transmeta chip in its Vaio Picturebook, making the laptop the first commercial product to market to feature the Crusoe. Now, all of TMTA’s revenues are generated from the sales of actual products.
During the last three quarters, the company has rung up product sales of $3.46 million, $12.36 million, and $18.57 million respectively. Look for product revenues to continue to soar as Casio, Sony, and NEC are set to unveil new Transmeta-powered notebook computers. Looking further out, analysts project that the company will grow its earnings 50 percent a year for the next five years.
Looking Forward
Currently, Transmeta is strictly a show-me type stock that needs to elbow it way into a niche it can become a solid market leader in. That strong niche for Transmeta could be in the server market. Server makers are already investigating ways to put hundreds of Crusoe chips in servers to conserve electricity. If using multiple Crusoe chips does save significantly on electricity, TMTA should be able to make a nice niche for itself in that market because of the power shortages going on today in California and elsewhere. Furthermore, Transmeta’s Linux connection recently came to the forefront as the company released a version of Linux called Midori that is focused solely on handheld devices. This version of Linux is intended to mesh more with TMTA’s power-saving capabilities.
The bottom line is that while Transmeta is a company to keep an eye on because of its technology, it needs several more operating quarters under its belt before its high risk level begins to drop.
Veritas: The World Leader in Storage Management Software
by Chris Connor
Overview
Veritas {VRTS} leads the world in providing storage management software. The company’s products manage corporate storage, protect networks from downtime, and ensure fast data recovery. A large percentage of Veritas’ sales is generated by licensing and bundling its products with products made by computer giants such as Microsoft {MSFT}, Sun Microsystems {SUNW}, and Hewlett-Packard {HWP}.
SAN Powerhouse
Veritas is a major force in the Storage Area Network (SAN) industry. Although Veritas does not make SAN components, it is still well positioned in the industry with such key SAN applications as online storage management and LAN free backup. The pervasiveness of Veritas in the SAN industry is apparent with the company’s long and impressive list of partners who participate in the SAN industry - ranging from pure SAN plays such as Brocade {BRCD}, Crossroads {CRDS}, Gadzoox {ZOOX} and Vixel {VIXL} to major computer makers such as Compaq {CPQ}, Dell {DELL}, Hewlett-Packard, and IBM {IBM}.
The killer application for SANs is the backing up of data. Due to SAN’s broadband capabilities, it takes backup traffic off a company’s primary or non-storage network which enables a company to back up its data during business hours and free up bandwidth for non-storage applications. Veritas’s LAN free back up products intelligently schedule back up jobs on SANs to optimize the use of shared tape drives. Veritas’s Netbackup automates the backing up of data over multiple servers from a single management interface. Netbackup also brings all storage devices under the purview of that one management interface.
Powerful Revenue Growth
Although Veritas has not generated steady earnings primarily due to merger-related charges, the company has displayed excellent revenue growth on both a year-to-year and quarter-to-quarter basis. On a sequential basis, Veritas has had 13 consecutive quarters of sequential revenue growth. Excluding the last two quarters, revenues have grown an average of about 15 percent a quarter. In the last two quarters, sequential growth has skyrocketed to 60 percent a quarter. Veritas’ annual revenue has also been rapid and consistent. The company has grown its annual revenues for 12 consecutive quarters. Veritas’ average annual revenue growth rate over the last 3 years (excluding the last two quarters) is an amazing 71 percent. However, annual revenue growth over the last two quarters has been even more impressive at 138 percent and 224 percent, respectively. The majority of the increased growth in the last two quarters came as a result of adding the revenues of recently acquired companies.
Risks
The biggest risk for Veritas is intense competition on several fronts. Not only does Veritas have to contend with storage leader EMC {EMC} and rival storage management software maker Legato, but Veritas has to go up against titanic customers and partners such as Microsoft, IBM, Sun, and Hewlett-Packard.
Investment Summary
Despite the sizable competition, Veritas should continue to dominate storage management software into the foreseeable future. In fact, some industry analysts think that Veritas is swiping market share from Legato, which has contributed, in part, to Legato’s recent problems. Veritas also has a few partnerships that put it into some exciting growth markets like Linux, with its partnership with Redhat, {RHAT} and Network Attached Storage (NAS), with its recent Network Appliance {NTAP} partnership. In the short term, Veritas’s stock may have some problems continuing its ascent due to its already sky-high valuation. The stock market has recognized Veritas’ sales growth and leadership by pushing the stock to about a $40 billion market cap with an astonishing price-to-sales ratio of about 74. Over the long term, Veritas should represent the premier stock in storage software the way that EMC represents the premier stock in storage hardware.