From: James Cramer
To: Nicole Urken
Sent: Fri October 14, 2011 08:59 AM
Subject: Rip up show--audible
ADBE—We need clip from Mcnamee on Squawk Box—looks like they have some new businesses that make it so he says next big thing—no one knows more than Roger so let’s get to it—New weapons—possible detente with Apple—Amazing—Is this the most undervalued tech name in our universe? Macromedia, Omniture, new operating system… This is something huge- we MUST nail this down.
From: Nicole Urken
To: James Cramer
Sent: Fri October 14, 2011 09:00 AM
Subject: Rip up show--audible
Sounds good. We are working on it. We have historically said Adobe is a loser in the war of “Apple vs the world.”
From: James Cramer
Sent: Friday, October 14, 2011 10:22 AM
To: Nicole Urken
Subject: RE: Rip up show--audible
This is more a Lazarus story for 2012. We pronounced them dead –it looks like those reports were premature. Doesn’t mean they can hit it out of the park right now. Does mean that they have gone well beyond Acrobat/Flash. Just need to quantify the way forward for a company that has made many smart acquisitions and Apple war over.
On Friday morning, we keyed in to form a thesis around a recommendation of Adobe for Mad Money after bullish comments from Elevation Partners co-founder Roger McNamee. (Shout-out to co-researcher Ted Graham who did the heavy lifting on the segment). To put this in context, we have historically been very bearish on Adobe, noting that the software company was left for dead after it went head-to-head with Apple over its Flash media player and lost, with Apple refusing to allow Flash to run on the iPhone or iPad.
The reason that McNamee’s morning Squawk comments prompted us to do a same-day segment on Adobe—changing course to view it as a value name—is a lesson on what separates value traps and value opportunities when it comes to tech. Prior to understanding the potential upside of HTML5 for Adobe, the stock was simply cheap, with no growth levers. Cheap is not enough in any sector, but particularly not tech. And this is a valuable lesson for the value names we have continued to push on the show.
When it comes to investing in the technology space, most investors auto-pilot to thinking about momentum and growth. Stocks with high multiples driven higher (i.e. momentum names) are sexy—think VMWare, Red Hat and Amazon. And, in contrast, supposed “value names” in tech—notably Hewlett-Packard and Research in Motion—which are both trading at a meager 5 times forward P/E—have continued to burn investors with perpetual stock declines.
How, then, can value tech be a compelling proposition? It’s all about separating the wheat from the chaff. The opportunities in “value tech” are names that are in fact “stealth growth plays”—names that have earnings power and growth because of their leverage to strong secular trends.
Let’s take a closer look:
Hewlett Packard and Research in Motion have been value traps for investors (and were defended for too long by the analyst community) for two reasons: (1) On the valuation side, the low Price/Earnings multiples for these names were deceptive, because the estimated earnings potential for both names was too high. In fact, next year’s consensus earnings estimates for both companies have come down significantly over the last twelve months.
And, (2) On the fundamentals side, both companies are not levered to growth. RIMM has not been able to win the growth consumer market and has become a victim of Apple’s success. HPQ has not been able to break away from its leverage to the slowing PC business and its unclear new strategic announcements leave investors with many questions.
In contrast, the value tech names with opportunity, which we have gotten recent strong reads from, are key to look at during this season for a longer-term hold. Four key ones? IBM, Apple, EMC, and Google.
IBM has been hit with some negative commentary today after its report Monday night, but this was a case where the risk/reward going into the quarter was not in favor of the investor. With the stock hitting new highs at the end of last week and analysts recommending the stock into the print, the company had to report nothing short of a blow-out (i.e. major beat & raise) in order to see strength in shares.
While earnings beat on the bottom line at $3.28 (up 15 percent), revenues were just in-line and the sequential backlog decline was a slight issue. When a stock is priced for perfection, even a slight issue will hit shares. However, running for fear after the 5 percent post-quarter sell-off is missing the big picture for this name. While shares could stall in the near-term as a result of profit-taking, the company remains a long-term buy driven by their very strong five-year plan and leverage to growth trends. Shares remain attractive at 12.5 times forward P/E, at the low end of its historical valuation—attractive, particularly considering the company’s $20 2015 EPS target, driven by revenue growth in the data center, smarter planet and cloud. In addition to growth outlook, IBM is an attractive haven for investors looking to invest in tech in an increasingly uncertain environment, given its defensive attributes, including its significant exposure to recurring sales which lends increased visibility to profit outlook.
How about Apple, which reports Tuesday after the close? Amidst the very sad news of Steve Jobs’ passing, the company remains strong given its product ecosystem and continued best-of-breed products, including initially-maligned iphone 4S that sold an astounding 4mm+ units in the first three days of its availability. The company is selling at 10 times P/E ex-cash—incredibly cheap given this incorporates consensus EPS estimates that are likely still too low (After all, 2012 EPS of $32 was $22 a year ago—talk about an under-estimation). Apple has been able to overcome the spend-thriftiness of consumers by offering products that consumers must have … which fit into the company’s broader ecosystem.
Google is another name that continues to defy expectations. Trading at just 13 times P/E with a 19 percent growth rate, the company is investing in the right areas and has managed to continue growth by capturing the holy grail of tech—the cloud, mobile and social—with an extra nod toward innovation led by now-CEO Larry Page. The continued dominant name in search, Google ad spend has seen acceleration from mobile (and increased Android activations)… and has also has a Google Plus kicker.
A fourth value tech name for your list? EMC, which reported a solid report Tuesday morning. The company is well-situated for the current focus of IT budgets—data center storage, cloud, virtualization and big data. And while the stock has begun to make up lost ground from the late-summer sell-off, it is still well-off its highs and is trading at an attractive level of just 14 times forward earnings with a 16 percent long-term growth rate. Importantly, EMC allows you to play the cloud virtualization theme via its 80 percent ownership of VMWare while not having the high multiple associated with VMW. Given its recent product refresh, superior execution and strong margins, EMC is a buy.
What do these names have in common? Exposure to strong secular growth themes (data center at IBM, big data and cloud computing at EMC) and mastering consumer growth (the social/mobile/cloud trifecta at Google and the unstoppable product ecosystem at Apple).
Being cheap isn’t enough. Remember, value is about a lot more than price … it connotes getting something that should be worth more at a discount. That’s what IBM, Apple, Google, and EMC have to offer. And that is why their status as “value tech” names stands apart from the woes of Hewlett Packard and Research in Motion.
The bottom line: Valuable is not synonymous with cheapness—it’s about upside. Adobe became a recommendation on Mad Money because it shifted from being cheap to being valuable with an upside catalyst. IBM, Apple, Google and EMC are levered to growth areas despite their cheap valuation. That is what separates them from the HPQs and RIMMs of the world and is why they should be bought during this seasonally strong season to be held for a longer period.