We published a Motorola positioning document and company analysis back in February (available here) that outlined how Motorola might establish some improved momentum and gain a better multiple in the market to drive the stock towards $20.  Even absent a bold strategy, the valuation of the company post-split is likely to be in the $11-12 range.  

Our analysis was mostly greeted by a giant yawn of mildly disgusted indifference. Motorola had been disappointing long enough (most would point to the RAZR in 1993 as their last real innovation) to be no longer worth paying attention to. The situation reminds me very much of the time that a company called Sterling Software (trading under the symbol SSW at the time) acquired the TI software business. Back then my view of the acquired business and was that in the next 12 months SSW stock was likely to double as investors learned how much revenue and earnings the acquired business would add. (SSW did indeed go on to double that year but was still a failure for me as a sell-side analyst because I failed to get clients to put it into their portfolios.)

Adding to the difficulty of getting anyone interested has been the lack of a clear point in time when the shares might start to outperform. In fact the shares have been “dead money” so far this year. But things are perking up with continued success in the Android market and the realization that the split may be a positive catalyst.

To that end, the sale of their wireless network business to Nokia Siemens for $1.2B in cash is a clear positive.  The value is more or less in-line with our $1.8B intrinsic valuation for this business since MOT is retaining the patent portfolio, some receivables and the iDEN business.  As described in our note, the Networks business was seen as “the best candidate [business] to eliminate,” and so it comes as some relief that a solution was found. The transaction is expected to be finalized before year-end, paving the way for the complete split of the company at the beginning of 2011.

We are mostly attracted to what will be the mobile computing segment of the company that will include both the Mobile and Home businesses.  We’ve made no secret about our preference for mobile and consumer Internet technology investments (as in “Time to Pull the Trigger“, June 2008) and see the combination of mobile and home-based Internet technology as a sensible way to address the consumer market.  Although the smartphone is the central feature of mobile Internet, consumers wish to take advantage of other networked devices in their home, and even in their cars, to extend the power and richness of their connected world.

The earnings report today demonstrates at least respectable execution which is all the company needs to begin to win investors over again. The success of Android is producing a powerful tailwind for the Motorola mobile business that will improve the fundamentals sequentially for the next several quarters in our view.

As the split gets closer we will do our IV analysis for the two companies but fully expect the shares to be in double digits in the next 6 months.  While not spectacular, this is a very attractive return from current levels in a very liquid security.  If the company were to execute well the equity value could easily top $20.

So here we have another stock that looks poised to double in the next 6 to 12 months. Apple is far more sexy (and we own that one too) but based on our IV there is more upside today in MOT.

Our overall IV analysis as well as that of the individual business segments is available to R2 subscribers.

[Disclosure: The R2 Model Portfolio has a long position in MOT and so does the author at the time of this writing. Positions are subject to change anytime and without notice. This post should not be considered investment advice.]

Tesla stock is off to the races today with a very successful IPO. An expanded number of 13 million shares were priced above the range at $17 last night.

Of course we have seen this race before – quite recently, with A123 Systems (AONE – $9.82), which traded into the low-$20’s before eventually falling back to their Intrinsic Value of about $9 share. Going back a bit we had the same experience with Netsuite (N – $13.44) which traded up to $40 immediately after their IPO (which enjoyed an increased size and filing range too) before trading down to Intrinsic Value a year later. (We’ve added links below to some of these reports if anyone is interested in them.)

In terms of raising money, the Tesla team has to be pleased with the size and pricing of the deal. It’s a great achievement for the investment banking and management team to get this result for a company at such an inflection point, not to mention two years away from generating any fundamental investment value for equity holders.

So from here we turn to our Intrinsic Value estimates for Tesla. Not surprisingly, there is no value there today if one looks out 5 years. However, on a longer-term view there is opportunity for appreciation, particularly in 2012 and 2013 when both production and IV can begin to ramp based on results the company can achieve in 2017 and beyond. We’ve included two IV scenarios for Tesla here for our readers.

We did publish our own report on Tesla over at SharesPost, where there are also a few others to peruse. There are also several good write-ups out there already that can help investors figure out how they may want to participate in this developing space. Here are a few:

Greentech: Tesla IPO – Gentlemen Start your Drivetrains

Why Tesla is Unlikely to Succeed

Although a good deal of the articles and reports on Tesla and the EV industry are skeptical (to put it mildly), there is a major variable that is impossible to quantify at this stage – which is the consumer.

First of all, an EV is great fun to drive. Whether it’s a Tesla or other brand they can be fast and silent which is a real thrill. Electric technology is likely to result in superior vehicles because of the innovation and flexibility that will be possible now in auto drivetrains.

Secondly, the aspect of getting away from gasoline and oil may be a more powerful incentive than many investment professionals realize. Between the ongoing wars in the Middle East, potential global environmental threats, and the Gulf oil spill, people may feel an emotional pull towards EVs that may help make the market develop faster than many anticipate.

The point is that it’s simply too early to pretend that we can really pin down what the broad market will look like and how Tesla will be positioned in 2015. However, we do know that the IV for Tesla will be below the current price for at least the next year. Even using a very aggressive case for the market and company development, the IV ramps only in 2012 and 2013.

Past Research on NetSuite and A123 Systems:

NetSuite IPO Preview.pdf

A123 Update Final Package June 7 2010.pdf

Disclosure: No positions in the shares of the companies mentioned in this post.

It was just back in early March that Steve Ballmer gave his “for the cloud, we are all in” speech at the University of Washington and sent an email along those same lines to all Microsoft employees.

Like many, I had more or less given up on Microsoft but thought that maybe the release of Windows 7 and a realization by the company that they really needed to do something different might change things. In addition, many Microsoft executives that I spoke to or saw present were being very honest about their shortcomings and lack of answers in areas like mobile computing and security. (Even Ballmer admitted yesterday that Microsoft was now “number five” in the mobile race.) So for a time I was open to thinking that maybe Microsoft in general, and Steve Ballmer in particular, was waking up.

Ballmer is infamous for his ham-handed antics as a CEO in the past and some of these are documented on YouTube. His head-in-the-sand stubborn attitude was shown also in his home where he reportedly doesn’t allow his family to have devices like the iPhone or use Google search. But at his U of Washington speech he seemed like he had lost a few pounds, was wearing glasses that made him look smart and, well, I thought… maybe.

In just two short months Mr. Ballmer has made it clear that he is beyond repair or reform as a failing technology company CEO. His inability to see the changing technology world around him will drive Microsoft ever lower in the food chain.

Ballmer doesn’t seem to understand mobile computing and the fact that it is fundamentally part of the cloud. My guess is that this stems from a view that is still rooted in the idea of a PC that uses the cloud rather than being inside the cloud itself. This is a very big problem if you are a technologist and responsible for the direction of a company like Microsoft. It means you see everything through a lens that distorts what is going on in the market.

Even Ozzie, another ray of hope introduced into the Microsoft darkness some time ago, appears to have a mistaken view of Android versus Chrome because he underestimates the power and potential of the mobile platform when combined with the cloud.

What Microsoft will have left are updated versions and upgrades to their declining (but still very large) franchise like Office, enterprise development and productivity applications. The company will remain important by virtue of their size and its tendrils in areas including gaming and smart cars.

Steve Ballmer seems to be unable to strike out no matter how many large technology industry shifts the company misses. Ballmer was recently able to make the statement that Microsoft “missed the whole cycle” in mobile computing as if it was a minor thing. Ballmer goes so far back at Microsoft that he is unlikely to be replaced. But after so many profound misses, the only chance Microsoft has is to do something akin to what IBM did when they brought in Lou Gerstner.

On the plus side, this is very good news for Google and Apple, who will continue to be competing with a giant that can’t see.

[Disclosure: The R2 model portfolio has long positions in both Apple and Google at the time of this writing. The author has a position in Apple.]

The platform war regarding Adobe Flash seems to have ended without a struggle. Adobe can thank Steve Jobs and Apple for making the end short and sweet. The past few months have been filled with intense debate and technical analysis of Flash versus HTML 5, but at a high level it boils down to the fact that Flash is old and HTML 5 is new.

From a personal standpoint I’ve always found Flash to be mildly annoying as applied to most websites (do I really need to watch animation to find out if the place is open on Mondays?) and fairly complicated to implement. However, for some applications Flash creates very impressive and easy to use presentation and navigation services. But the learning curve is steep and of course one has to pay Adobe for the privilege.

Flash would have probably stopped growing and more gradually faded as a deployment technology over time. Apple and the letter from Steve Jobs made the process happen faster and more crisply. Not everything that is outlined in the letter is strictly true but the veracity is enough to be conclusive for most readers.

So what does it mean for Adobe?

It will be important for Adobe to accept and embrace HTML 5, as many infrastructure and content providers are doing. They will gain nothing by being opposed to it. I think of HTML 5 as just another visual rendering method. Flash has more in it but that doesn’t mean content and applications can’t use HTML 5 instead. So Adobe should end up being part of the solution rather than a problem if they are smart about it.

Flash is also only a small part of what Adobe offers today, so the sooner the focus shifts off Flash and to the larger set of products in the Adobe Creative Suite (Photoshop, Illustrator, Designer, Acrobat, DreamWeaver, etc.) the better. Adobe also has an under-appreciated franchise in the enterprise with LiveCycle and some collaboration products.

As for Flash and Adobe Air, they will continue to be of interest to developers who want to build applications that run across platforms. Although Steve Jobs rests his argument in large part on the inefficiency of not writing directly to a specific platform, the fact is the cost of supporting multiple platforms is very high and for many applications the differences between platform-specific implementations might be slight anyway.

From a stock standpoint, Adobe (ADBE) is trading at a discount as investors digest all this controversy and try to measure how much impact it will have on the Adobe business and/or the multiple afforded it. I’d say the current price represents some extra value for investors since it makes the upside to our Intrinsic Value estimate of $42 pretty attractive.

As long as Adobe management seizes the opportunity they have to take a leadership role in helping the creative world move forward with more powerful tools like CS5 and with support for new standards like HTML 5, stockholders are likely to be rewarded from current levels.

[Disclosure: The R2 Model Portfolio has long positions of both Apple and Adobe as does the author at the time of this writing.]

I finally took a little time to try and put an Apple iPad through its paces.

There are a few things you notice in the first few hours of use:

1. Strangely, the gesture-based interfaces are inconsistent within Apple software applications on the iPad. One simple example is scrolling right or left with the familiar drag of the finger across the screen. It works as expected in Photos but not at all in Calendar. (You have to actually click on the day, week or month desired.) In iTunes one has to click on the left or right arrow to scroll. At this point in time it’s just plain bizarre that the navigation, especially the calendar, would be so non-intuitive and not take advantage of the common touch and gesture interfaces.I’d say that these are relatively minor issues but they creepily remind me of the inconsistencies that became a standard feature of Microsoft products. Having three different interfaces for moving right or left in three common applications from the same software company on their own device, is not good.
2. The lack of multi-tasking is much more noticeable on an iPad. Even though there is no technical reason for thinking this way, a larger device just feels like it should be able to do more. Some critics have pointed out that the iPad is just a “big iTouch,” which is not really accurate, but the lack of multi-tasking makes it feel clunky when doing multiple things at once – which is the norm these days. This should be addressed later in the year when the new OS comes to the iPad in Q3.
3. Finally, the App Store leaves much to be desired in terms of useful information about the applications – which is nothing new. This makes finding the right and/or best applications for the device much harder than it should be. For example, by typing in a keyword to search one is presented with just a list of applications; no overall user ratings or metrics to help figure out which one to try. There are some startups focused on rating and ranking applications in the Apple App Store, but this seems to be a core area Apple itself should be paying more attention to.

This testing is from the perspective of a casual user rather than a “toy geek’s” – we didn’t research each point to see if there might be tricks or workarounds because a consumer product experience should be based on casual rather than ninja user expertise.

These may be minor issues for now. I do find the software inconsistencies a little troubling though. For now let’s just say these will evolve in the right direction, especially with the OS release this year. We’ll see.

Meanwhile, the iPad appears to be crushing competition in tablet space as demand for the WiFi and 3G models remains strong and Windows-based systems look lame. The iPad adds to an already dominating franchise in the Mobile Internet space for Apple. It’s too early to say that models based on ChromeOS or Android won’t be serious competition. Haven’t seen them yet though…

[Disclosure: Apple is in the R2 Model Portfolio and the author also owns shares personally at the time of this writing.]

A few weeks ago, an inspired email exchange between ourselves and some research partners made it too hard to resist posting Why not just eject Greece?. After that the matter seemed to pass and markets quickly forgot about the problem.

But, given recent events and our little downdraft yesterday, we find ourselves returning to the topic. The other solution we discussed was that Greece should simply sell off some of its islands. Greece has about 6000 islands, most of which are uninhabited but potentially quite valuable.

They are beautiful and a very popular vacation destination for the population of richer countries like German and France. Also, just think about how much Nordic countries might like a warm oasis down south!

Since many of the islands are uninhabited and have no infrastructure, Greece would also stand to gain valuable short and long-term economic growth from the additional infrastructure investments and nearby population growth.

In short, selling off a hundred islands or so would be a huge win-win, and such a number is still a very small fraction of what Greece owns – so they wouldn’t even really need to enact radical reforms since they could finance  future expenses with more island sales.

This strategy would get them through approximately the next 100 years, depending on their economy and the ultimate prices realized from the sales. Of course, I’m sure they would want to draw the line at inhabited islands or, in the very worst case, Crete.

Some have pointed out that this “can never happen” because it’s somehow “wrong” for rich countries to “take advantage” of poor ones. All I can say to that is “WHAT?!” This is a country of adults who can well decide for themselves how to run their country, and they are hardly poor. Add to that the fact that the government engaged in what most agree was fraud in overstating revenue and understating expenses to avoid harsher punishments earlier in the process – so why not?

As we wrote earlier this month, if you want a union of equals then the countries have to take responsibility for their own actions. This is a “crisis” that was brought about by a simple lack of caring, honesty and attention. If there was a natural disaster, of course help should be forthcoming, but I fail to see any compelling reason for there to be in this case.

My business partner is fond of calling Europe “a beautiful museum,” and so it seems fitting that if money needs to be raised, a country like Greece might call on Sotheby’s to showcase and hold a fine auction of a hundred or so of its islands. That way rich individuals, corporations, and countries can bail Greece out cheerfully in exchange for a small piece of waterfront property. (Didn’t America do this once in the 1980’s with Japan?)

Our friends at GaveKal argue that if Greece doesn’t get bailed out, it’s clear that country risk will return to the fore of yesteryear. It’s also been made clear that the Euro will not shelter Europe from any crisis, as it once was thought to be able to do. Given these realities, some major waves of asset pricing will have to roll through the Euro zone before the dust settles.

“Fasten your seatbelts. It’s going to be a bumpy night.” – Margo Channing (Bette Davis) in All About Eve

The technology geek side of me doesn’t meet the woodworking side very often, but yesterday I put in my order for a new MacBook Pro to replace my current model which is a little over two years old and still works quite well.

Apple products are certainly more expensive then their WinTel analogs. Because I have to use some Windows-only financial modeling tools, I carry a Windows laptop with me as well and use the systems side by side all the time.

There’s an ongoing debate about how one “justifies” the higher prices that Apple charges for products that seem similar to others. You can take that argument in several different directions, but this morning I was thinking about a popular woodworking guru, Norm Abrahm, who hosts a wookworking show called The New Yankee Workshop.

The 15″ MBP is a perfect laptop, as far as I can tell, and the new version with all the trimmings (well, not all – if you include a big SSD drive, max memory and support it could easily get up to $3,500) goes for around $2,500. And frankly this seems like a lot of money for a computer.

But if you’ve done real work in a shop you know something that Norm speaks on with authority: don’t skimp on your tools. If you use a laptop the way I do it translates into about 3,000 hours per year on the computer, and with a two-year life that’s about 6,000 hours of use. Doing the math makes that 50c an hour or $4/day. I just spent $5 on a bagel and coffee for breakfast, so since this is my primary tool in the technology and business department, the cost for what I think is the best tool by far is pretty small despite the fact that it is about 50% higher than a similarly configured (but still inferior) Windows machine.

Few can afford to have the finest version of every tool in their workshop. I do lots of sawing and planing but much less turning and routing. So you spend big on a table saw and a planer, but go basic on a lathe and a router setup.

If you’re a casual computer user you can get a basic computer for $700 which can do everything and make you very happy. But if you are a professional, then when it comes to content of any type then Apple makes a strong value proposition.

It’s another reason to worry if you are an Apple competito,r because if more and more of the creative and content-producing people of the world opt for a platform that gives them greater pleasure and productivity at a higher raw cost, it will leave the Windows and the Microsoft ecosystem looking more and more tired.

The jury is still out on Google and how their Android-based and above-the-OS layer software products and services will evolve. And their increasing rivalry with Apple will make it harder to rely on the ability to be successful in conjunction with Apple products and services longer-term.

Don’t skimp on your tools. Despite the high purchase price, the Apple MBP is the New Yankee Laptop in our technology analysis workshop.

[Disclosure: The R2 Model portfolio has long positions in both Apple and Google at the time of this writing.]

Okay so we don’t know anything about politics or economics but let’s look at Euro-land like a stock.

There are a bunch of different businesses, from the long-established Germany and France (cash cows) and the up-and-coming countries like the Czech Republic (stars.)

But then you have Greece. In the strategic analysis it is a dog. It’s not providing growth or positive cash flow. They have had many warnings and restructuring programs but there is still no end in sight.

Greece seems to have compounded their problems with fraud and trying to conceal the depths of their issues from Euro HQ and the other divisions.

What’s the right thing to do?

In this case you jettison the division and let it find it’s own way.

How does Europe lose by making an example of Greece? Some say that yields on Euro bonds would have to go up. I say not so. Germany and France will still be Germany and France. If anything they will improve because investors will know that they will not have to pay for chronic problems like Greece.

After all, yields on state and local debt in the US vary from place to place and all differ by instrument type and have a spread over treasuries. Why shouldn’t European country debt have the same dynamic? Just because it’s the same currency doesn’t mean we can’t analyze and price country risk separately.

What will happen to Greece? Nothing. They can go back to their own currency and try to restore confidence in their system, country and economy. Some Greek companies and people might lose some mobility or business preferences but they certainly won’t be fatal. This is Greece after all. The international companies there built themselves up before and during the Euro area. They will continue to do so after.

The Euro makes a statement that they know how to deal with change in both directions. So far it’s been absorb, grow, and expand. Every business has to prove it knows how to deal with problem divisions, markets and management teams.

By the way – by all appearances there are many investors salivating at the chance to buy Greek assets on the cheap. Getting dropped from the EU might be the best thing that ever happened to the country and also a good thing for Europe and the Euro.

There will still be major benefits to being part of the EU, but there are also benefits from not being part of the EU – and they cut both ways.

I say eject Greece and focus on building a strong EU. If you can’t let a chronically weak division fail then you are not going to have a strong company.

Some of the launch energy of the iPad has ricocheted off Apple and hit Amazon.

Turns out that the iPad is another powerful channel for Amazon although in this case it’s just the Kindle reader software running on the Apple hardware. There are still many who say the Kindle is a better, lighter form-factor for books while iPad fans cite the joy of being able to do music, video and applications in addition to reading.

Either way Amazon comes out a winner. Apple is working hard to expand their titles but Amazon is far ahead in terms of selection. Apple gets to win too because all those applications make the iPad an another easy-to-buy product.

Books are still evolving into the online world. Not being able to share, lend, or resell online books come to mind right away. Of course being online brings important advantages like immediacy, portability and the ability to synthesize information from different books easily.

Many cite this as just another transition like the one we went through with online music. Most people really miss their compact discs or vinyl records. But of course in that transition we were able to import all our old content into the new system so there was little loss. Making incremental purchases of content in a purely digital form seemed okay at that point.

But owning a book today won’t get you a break (in most cases) on the digital edition. Some publishers like O’Reilly, have offered much more innovative approaches like the “bookshelf” concept, where you can pay a flat monthly fee for access to a set of books that you can configure and update as your needs and interests change. It’s very well suited to the non-fiction and technical realm in which they operate. There are newer innovations there too like “rough cuts” which allow access to material in pre-published form and “living editions” which get constantly updated to stay current with changes in subject matter.

There is something special about a book. In a year or two such a statement may seem very quaint. Maybe it’s me. My parents were both librarians and about the only physical possession I miss when moving or traveling are my books. I can’t imagine not owning a physical copy of the OED. It’s too much fun to take out a volume to look up a word. Having said that I realize this probably puts me in the same category as the people out there still cherishing their vinyl record collections and tube amplifiers that generate “real, true, rich” sound.

It’s been easy to resist the Kindle as being an impractical device since it’s limited to doing only one thing. The Apple iPad destroys those arguments since it can do many things like video, music, email, games and runs the Kindle reader software just fine.

In conclusion I think the Kindle paved the way for the iPad but now the iPad will accelerate the adoption of digital books in a major way. Before the iPad I would say “I don’t want to read a 1000 page book on World War I history on my laptop so I’ll order the book.” But now the iPad offers enough of a “laid back book-like” experience to change that decision to a click on the “Kindle edition.”

Good for Amazon, Good for Apple. Good for innovative publishers like O’Reilly.

[Disclosure: At the time of this writing the author owns shares of both Apple and Amazon. The R2 Model Portfolio holds a position in Apple.]

Let’s say we’re in another positive cycle of better times for Micron. We’ve been through them before; the most notable and mind-altering one was in the mid-1990’s. Although it got eclipsed by the Internet bubble a few years later, it was a heady time and everyone wanted to own Micron.

The problem for me as a growth investor is that Micron seems to be just a new-age commodity company. Memory sizes are growing so Micron will ship far more “bits” every year. But thanks to advances in density they are basically shipping the same number of chips. (Micron fans will point out that they are expanding lines and shipping more chips but let’s just think about it like the “same store sales” model. In that analogy Micron grows by adding stores but the stores themselves don’t grow.)

To put a consumer perspective on it I buy a USB key or two every year for the family and pay around $10. So it’s the same $10 per year over many years. Not a bad business if you consider the millions sold but not growing either. It’s true I get a 4GB or 8GB key now versus the 128MB I was getting a few years ago but Micron had to bear the capital investment and development cost to get my $10 again.

Of course Micron sells other types of memory but it’s all the same. You get one or two sticks of RAM for your laptop and they just have twice as much memory on them every year. Same two sticks, same price as long as you don’t try and buy at the tip top of the density curve.

In some ways it reminds me of EMC. A little less than a decade ago EMC was trading at book value and generating huge amounts of free cash flow (FCF) It was the one and only time I bought a disk drive stock. However, EMC has acquired many software companies to improve the dynamics of their business. They were very fortunate in their purchase of VMware which now is talked about more as a value driver than the company itself.

Sometimes it doesn’t work out so well if the acquisition comes at too high a cost (Veritas comes to mind) but that certainly doesn’t preclude the acquisition strategy from starting to improve the dynamics of the business. Of course some companies, like Dupont and 3M, have figured out how to innovate enough around pseudo-commodity markets to enjoy brand-like margins and better growth.

It appears that Micron is headed for a great year ahead with improved demand, stable to improved pricing with limited planned capacity additions. This will allow the company to generate close to $2B of FCF.

But the up cycle has always been followed by the down cycle where capacity comes into the market, usually just when demand is starting to ebb and prices are falling. So most investors discount the down cycle on the way up. (This is the same way the auto companies used to trade. As senior analyst Dave Healy used to say “you buy them when their PE is infinite and sell them when the PE hits 4x.”)

Most of the semiconductor companies we follow have substantial IP and software in thematic areas we invest in like the Cloud, Mobile Internet or RealVR. This year may be the last good chance Micron has to do something very strategic and transition the company to a model that attracts long-term growth investors.

Should they buy a GPU company? That’s an interesting thought.

[Disclosure: I own a bit of Micron here because I think it can move higher given the fundamentals and market conditions, but it's not and will never be a long-term holding unless something changes.]