Google Returns aint Got Nothing On These Internet Stocks...

If you think the hottest Internet stock floating in the market is GOOG, think again...

Akamai Technologies Inc (AKAM) has returned 165% (incl. price changes and reinvestments from any dividends ie. conpounded annual total returns) in the past one year. Thats a whoooooping 55 times the return of google in terms of compounded returns. This Boston-based tech firm provides internet business solutions to business customers by helping them manage their online content and application delivery.

Like a lot of Boston-based tech firms, its founding roots can be traced to a MIT Math professor who still currently serves as chief scientist and has built up a management team comprised of former Forbes 500 managers.

Another hot potato is Digital River, e-commerce provider of a myriad of online solutions including management and maintenance of transactions, security, traffic flow, marketing and optimization of online stores for business customers. Its 1-year return of 87.6% outpaces that of GOOG.

More on their fundamentals later...this is just a teaser.

When the chips are down...

In keeping up with our week long tradition of prying into companies in the news, lets shift our focus on the endless saga between Intel and AMD that reads like 2 over-the-hill pensioners trying to out-wheelie each other in their wheelchairs.

First, a look at the charts...

Semiconductor sector performance for the past year has been underwhelming. A victim of competitive profit-gouging price wars, AMD has appeared to be most affected by the declining profit margin in its microprocessor business, dropping profits on per-chip sale to 36% from 56% a year earlier. Even the introduction Microsoft's Vista OS in Jan '07, the supposed elixir to the ailing semiconductor firms, failed to boost revenue. With the PC market lagging, the strong positive correlation between the PC market and semiconductor business is dragging down all computer hardware stocks.

Intel, the larger company (mkt cap 122.3b vs 8b AMD), is more equipped to ride through the price cuts through cheaper and more efficient manufacturing processes. Intel has invested heavily in the skilled and cheaper labor in Asia when it expanded its manufacturing operations to Malaysia, Vietnam and China. Intel's manufacturing export, tied with its more efficient manufacturing technology, allows it to outlast AMD in a prolonged price war.

Both Intel and AMD in collaboration with IBM officially announced "the most exciting breakthrough" in transistor technology since 1960. Using different techniques, Intel and AMD are introducing faster microprocessors with transistors at the 45nm level that will bump up cycle rates 50% or more. The well-timed news will spark off a race between the 2 rivals to realize their respective new transistor technology in chips used in consumer products.

Focus on Intel..., a company with one of the strongest fundamentals among large US companies (8b in cash in '06 vs 1.8b in long term debt), has seen its stock price decline more than 30% in the last 3 years from a high of ~$34 in 2003-2004. Most crucial to this fall is the declining profit margin, down to 15% end of FY'06 from a 5-year average of 18%, largely contributed by the fall in operating margin by 9% from the 5-year average.

The chart above shows the declining EPS for the TTM. From an EPS of 1.4 to 0.87, thats a drop of nearly 40%! Definitely not a stock for value investors looking for steady earnings growth without sharp earnings fluctuation. This earnings fall is the steepest single-year fall since the tech industry downturn of 2001-2002 where earnings dropped about 67%. Though management has been steadily increasing dividend income (div up 38.97% from '02), this could be a signal that management is trying to compensate their investors for lack of future stock price growth.

There are few positives that can be taken from Intel's fundamentals. The short-term trading prospects of this stock is not surprisingly, just as ominous. Looking at some of the technical data...

The 1st chart shows the MACD line dipping under the signal line with increasing divergence from the signal and the ROC indicator shows a downward stock price momentum building up.

The long term future of this stock may simply lie is its fundamentals, the management's ability to push to market the new 45nm microprocessors and the general climate of the consumer PC market. Efficiency may increase due to increased manufacturing throughput of the smaller microprocessors, which will lead to improved operating margins. However, its earnings have such a strong correlation with the sales of its main customers like Dell and HP and the desktop software providers like Microsoft that to accurately judge the direction of the stock price, we have to take a large cross-section of the PC tech sector to evaluate Intel's chances for a turnaround.

Google - Where is the stock going?

Introduction
In recent weeks, Google has lost close to 10% of it’s’ per share value. It has plummeted from $500 to $460 within a span of a few weeks. Most people speculate that Google is an over-valued stock and it is destined for a bearish future. Others believe that Google will grow at a constant pace as it continually redefines the entire Internet marketing and searching experience. What is StockRocks take on this growing company who has captured the attention of its’ shareholders since it went public?

Fundamental Analysis
Google reported excellent earnings for 4Q ending 2006. Their earnings came in at $1.03 Billion, or $3.29 per share for the last three months. Compare this to only $372.2 Million, or $1.22 per share in 4Q in 2005. In 2007, analysts estimate that Google is expected to earn an average EPS estimate of $12.69 for the year or an average of $3.17 per quarter. These figures are stunning and indicate a very bullish year for Google.

With the recent purchase of YouTube.com for $1.65 billion, a popular video viewing website receiving millions of hits each month, Google has expanded its horizons in capturing the media market. In addition, recent news indicates that the company is getting ready to purchase Adscape, an in-game advertising company. One thing for sure, Google is definitely growing and they are purchasing various sectors of the Internet market.

Google is definitely taking market share away from one of their largest competitor, Yahoo. Google’s market capitalization at $143 Billion is more than triple Yahoo’s at $43 Billion. Even though Yahoo’s management is repositioning itself and revamping its strategic marketing, it will be some time before Yahoo regains pace with Google.

Let’s take a look at the stock price of Google. The market has set a price of $469.94/share at the end of Friday’s trading day. As I mentioned earlier, Google’s stock price has been down close to 10% and that’s okay. With profit taking and news about the economy slowing down, the market can be very volatile. Ignore it! Let’s take a look at 2008’s forward P/E of $37. Combine this figure with the 2008 EPS estimate of $17 and Google’s future per share value is $629. Applying a discount factor of 10% to match the S & P 500’s yearly returns will give you a present value of around ~$520. The intrinsic value of the stock at $520 compared to what the market sets at $469 has a margin of safety of 10%. Our stock valuation indicates that Google’s stock is attractive.


Technical Analysis
Let’s observe some technical indicators.


MACD (Moving Average Convergence Divergence) : The MACD line is slowly creeping up towards the signal line. The MACD line has been floating below the signal line in the past few weeks, as exhibited by the stock falling. If the MACD crosses the signal line, it is a good entry point.

ROC (Rate of Change) : The ROC indicator had a negative slope and appears to be flattening at the bottom and should pick up and shift upwards.

Bollinger Bands : The graph indicates that the recent price of the stock has been bouncing
off the lower standard deviation of the Bollinger bands. This behavior is more likely a result
of the stock being oversold. I would expect the stock price to bounce off the lower Bollinger band a second time to confirm an upward shift in momemtum.

Summary
Google has a positive future outlook. The company will grow at a fairly constant rate, putting more money in shareholder’s pockets. Again, this is based on my own research and due diligence. I am not providing a recommendation on the stock. Please use this information at your own risk.

Note : All images are courtesy of MSN.com and StockCharts.com

Whats wrong with Microsoft?

Pressure on New Products
Microsoft's share price took a beating in the stock market this week ending 02/16 on CEO Ballmer's seemingly self-decapitating claim that the current consensus on expected Vista sales were "overestimated". Sales for the consumer-version of Vista OS and Office 07, released in January, have fallen "below estimates", though it is a typical trend for the sale of previous releases of MS OS to start slow and gradually pick up steam.

Their main revenue-driving product aside, CFO Liddell stated end of Jan that original sales estimates of the Xbox360 were too high, and has cut sales projections for FY'07 by 3m units to 12m. However, Xbox360's first-to-market strategy has seen them outsell Sony's PS3 and Nintendo's Wii and their pricing value is advantageous. Priced about $150-$300 lower than a PS3 and a wee bit higher than a Wii, but loaded with alot more features than the Wii, it is suitably placed to attract neutral gamers.

MS's market entering product into consumer electronics, Zune, despite a promising launch, has significantly lost ground on its sales target of 1 million sales by June 07. However, it may still meet the original market estimate of 500,000 units sold. Realistically, any predictions on MS's ability to chisel off Apple's market share of portable media players are premature as the ipod sold 250,000 units in its first year of launch. If MS is serious about the Zune, it will be as focused in design, feature and technology improvements as it was in launching the Xbox to compete with Sony's PS3, the gaming equivalent of the ipod.

Future Growth Analysis
Microsoft is a company in an experimental expansion phase. It is gambling future growth on a few business areas that already has incredibly strong majority players. In the next few years, and as soon as 3rd quarter of FY07, Microsoft plans to allocate more of its operating budget to R&D of the Zune family of products and to its lagging internet service and advertising business. Earnings growth in those 2 areas are not promising as iPod and Google have a commanding 75% and 42.3% market share respectively. MS is forecasting the Xbox business to start recording a profit by FY08 so that makes all their emerging products relatively poor indicators.

Technical Analysis

From the MACD chart (2nd graph), the blue line (darker line) shows how the MACD fell sharply during the late Jan-Feb period, possibly indicating overactive selling as a knee-jerk reaction of Vista's poor opening sales. At the same time, corresponding stochastic readings in the bottom chart shows strong indication that the new 2-month price lows being reached, may bottom out. This trend is corroborated by the narrowing of the divergence (black histogram) in the MACD but not the widening of the Bollinger bands (1st chart) where std dev size measures volatility. The smaller the divergence of the MACD the more stabilized the stock price is, which may indicate the stock bottoming out. However, with the actual stock price still reaching 2007 lows, entry positions into the stock should be held back to allow the downward trend to lose momentum.

The StocRockin' Point of all this?
My opinion is that MS stock will continue with its downtrend for just a little bit longer, until the consumer market buys into the Vista and Office 07, core products that can compensate for lack of growth in other MS business units.

Trading style and beliefs

Stockrocks believes in a blend of growth and value investing with special interest in the finance, energy, technology, retail, automotive, defense and aerospace sectors. We do not aim to provide stock picks or recommendations, but to provide sound fundamental and technical analysis that may aid in a small individual investor's decision making.

Quantitative analysis is our strength. We will provide charts and numbers to support any valuation we make of a stock. Stockrocks has no corporate or political affiliation. Our amateur site is purely for informational purposes and meant to solicit feedback from readers in order to further hone our analysis skills.

We hope as time goes by, the analysis we post will gradually mature and be of more help to the general investor public. Every month, we will be posting stock analysis from a new sector of our choosing and this month, we shall start with the sector that is gradually recovering it lost glory from the late 90's -- Tech!