Dronamraju Ravi Prakash

I wanted to look around and find some other picks - other than Google, Yahoo, juniper etc. Looking at the market, it was pretty disappointing at first. It did not seem like there were any growth stories except Google, eBay or Yahoo!.

I thought a lot about short plays. I came up with a few short plays (ASKJ, AAPL). However, my tendency is to be a long investor and i like to find growth plays. I'll come back to these short plays later, however, I started digging deeper to find any growth plays.

I found 2 interesting stocks. One is a tech stock and other is in healthcare. What I like about both these companies,

1. Profitable companies
2. Growing well (not google like but good growth)
3. Valued fairly

The first one i like is ISSX (Internet Security Systems). They came out with solid earnings report this morning, beating revenue estimates by a million. They growing sequentially about 3-4% and that's not bad for the current tech environment. Overall, the internet security trend is something that will expand and ISSX is positioned well.

The second one is a very small cap stock. I like PRZ (Paincare Holdings) a healthcare service provider. They identify niches in the service industry like managed practices or limited management practices. It is trading 3 times trailing twelve months revenue of 24.7M$. They are profitable at these revenue levels with net margins of 10%. Another in the same industry is USPH (US Physical Therapy)

I have held DELL close to a year now. The stock hasn't gone anywhere, while the earnings, revenues grew solidly. There are no signs of DELL slowdown. But, they don't pay dividends.
I am finally giving up on dell and getting out of the stock (i am sure it's going to double in the next 2 months)

I guess most of us were expecting this after friday. Today it happened. As of now Google is trading at $178.94 giving it a market cap of $48.53B, slightly ahead of Yahoo! which is at a market cap of $47.18B after dropping $0.28

http://finance.yahoo.com/q?s=YHOO,GOOG&d=s

so GOOG (Google) reports earnings in gross terms including TAC (Traffic Acquisition Costs). The very impressive 805.6 million includes TAC. Excluding TAC the revenue for Q3 is ~500 Million. Not that this number is something to sneeze at, however, it puts the overall GOOG (Google) revenue numbers in a different light, as we try to compare it to it's peers (YHOO, EBAY).

Excluding TAC, GOOG is more likely to be earning somewhere between 1.5 to 2B in revenue for the year 2004. This is markedly smaller than it's peers YHOO (Yahoo!) or EBAY (eBay).
However, looks like they also have the advantage of staying in the high margin text ad business. EBAY (eBay) is expected to earn a net income of ~800M on a revenue of 3.22B roughly 25% net margins. GOOG (Google) earned ~212M on a revenue (ex-tac) of 503M, roughly 42% net margin.

So even though, Google's revenues are smaller, their growth rate is strong and margins are strong. Does that justify the valuation? My judgement says, YES.

Just saw this slide on CNBC. The commentator is comparing 2005 PE ratios (estimated i assume) for the top 4 internet stocks

2005 PE based on current price
* AMAZON : 29x
* eBay: 62x
* Yahoo: 72x
* GOOG: 45x

GOOG @250/share: 66x 2005 earnings.

wow!!!

wow! 805M in revenue for 3Q for GOOG. Google (GOOG) posted a sequential growth in revenue of 12+%. Amazing.

9 month revenue of 2.157B. We should probably assume 10% sequential growth for Q4. I know this is more than 6% we used the other day, but it's less than what GOOG put out in Q3. We are looking at Google's revenues for 2004 to be 3.137B!!!!

Ebay's 2004 revenue estimates are at 3.22B. Ebay has a market cap of 65.3B. Why shouldn't google have the same market cap as ebay?

At a 60B market cap, GOOG shares should be trading at 221$. Mark my words, 220 is coming sooner rather than later.

NFLX (NetFlix) dropped a bombshell last evening. In view of the competition from amazon, they reduced their guidance to $0.00 in earnings for next year and reduced the subscription price to 18$

umm... amazon hasn't even announced their product yet...

I think the real reason for subscription price reduction is not amazon. I think the price increase has not gone well and subscription acquisition has slowed down. They are using amazon as an excuse to correct their mistake and set the bar low (very low) for next year.

In anycase, right now, investors will be paying $246/consumer when buying NFLX (NetFlix) shares. That compares $216/year each consumer pays Netflix. Now the company looks really interesting, even disregarding the upside from any future growth. I doubt amazon would reduce NFLX customer base immediately, they might put a dent in the growth numbers. However it would take a lot for NFLX to start losing customers. So we are looking at increasingly compelling investment here.

I will definitely pick NFLX up if it drops below 10

GOOG is a high profile IPO that has already appreciated 70% in the last 2 months. There have been a lot of press about why one should not buy GOOG (Google) stock.

Are there any reasons to buy google? Here are few reasons.

• Google is one of the top 500 capitalization companies that's not in S&P 500. GOOG (Google) will be added to s&p 500 before the end of the year. All the index funds will have to pick up GOOG.
• Adsense. Adsense has pretty much cornered the market of small websites which want contextual ads. My guesstimate is that adsense gives a ~25% cut to the website owner and GOOG (Google) keeps 75%.
• Google has been growing at a blistering pace of 120% y/o/y in the first 6 months of the year. They made 1.35B $ in the first 6 months. From Q1 to Q2 the growth has been 7.5%. giving a discounted rev growth of 6% quarter over quarter remaining year we are looking at yearly revenues of 2.87B. That compares to 2.57B for yahoo! at the top end guided my yahoo! management.
• By the end of year, GOOG will have more rev than yahoo! and more revenue than EBAY. Yet, right now, GOOG is valued at 20% discount to y! and 40% discount to EBAY.

Any other reasons to buy GOOG?

Netflix (NFLX) came out with an announcement about it's subscriber numbers prior to it's earnings announcement. First of all, i never understood why they don't release this number with their earnings report. Because you can essentially figure out the revs from this number. Looks like they are going to stop this "pre-announcements" from next quarter.

They are 2.23M subscribers at the end of September. This is a solid growth from the last year's levels. However, i think the subscriber growth numbers are going to slowdown from here onwards. We can already see sequential growth slowing down and cost of customer acquisition increasing.

With a market valuation of 950M, Netflix's customers are worth 426$ a pop. Is that too high? too low?

So I noticed the following line in the access logs of my webserver

66.218.65.52 - - [04/Oct/2004:20:56:12 -0700] "GET /stocks/atom.xml HTTP/1.0" 200 27338 "-" "YahooFeedSeeker/1.0 (compatible; Mozilla 4.0; MSIE 5.5; http://my.yahoo.com/s/publishers.html; users 15; views 1024)"

Does it really mean 15 people have added this blog to my y!? sweet.

Late thursday night, Tivo and Netflix announced a partnership to figure out movie downloads. Essentially, it's announcement of letter of intent to develop products together that allow movie downloads. No terms were disclosed, no insight was provided into how this service is going to work or when it is going to launch.

Basically, they said, "Hey! we think we should work together and we are planning to". Big Deal!

However, it's a more of a big deal for TIVO stock than for Netflix (NFLX) stock. Tivo, has been facing an onslaught of cheaper imitators in it's space. They have not been able to demonstrate growth for their product. Infact, DishNetwork supplied more DVRs than TIVO in total. It also seems that their deal with DirecTV is falling apart.

This potential venture into movie downloads puts TIVO in a position to become a platform for video-on-demand content delivery to people's TVs. That is ofcourse, if TIVO can figure out how they can deliver the movie to consumer's Tivo box. It better not be a phoneline.

As for Netflix, i guess this gives them a way to participate in the broadband world. However, this is no additional advantage for Netflix. TIVO can potentially strike these deals with all of the netflix competitors. Yea, netflix might be a player in a downloadable world, but so can it's competition.