It’s a new year, and, as usual, it is starting with a bang:
- The JPMorgan Healthcare Conference gives biotech companies a place to shine;
- The Consumer Electronics Show in Las Vegas unveils the latest and (a) greatest or (b) silliest ideas from inventive tech minds all over the world;
- And Macworld San Francisco gives Steve Jobs his favorite podium to surprise us about the future of consumer electronics.
In all areas of technology, there is always another new product around the corner, and my job is to find the real life-changing revolutions — the MegaShifts — and get you into the public companies that will be the leaders of their respective MegaShifts and are trading at attractive prices.
Of course, timing is always a balancing act, as these early-stage ideas often involve development-stage companies that are losing money while they build a dominant market position. Although we sometimes get to participate in a MegaShift with larger companies like Toyota (TM), Comcast (CMCSA) or Huaneng Power (HNP), the real multiyear potential often lies with the little guys. I will always tell you what I think the stocks can sell for, but as we all know, a one-year target can turn into a two-year target pretty easily in this arena. The key to banking big long-term profits is patience — don’t be a swing trader or flipper, but try to build a big position with a multiple-buy strategy and hold it as long as the underlying theme is on track, regardless of where the day traders and market makers price a stock in the short term. That’s easier said than done, I know, but in the long run you will make and keep a lot more profits than the momentum guys who are chasing the next Taser.
These thoughts came to mind this week because even though I am still concerned about the broad market, we currently have an opportunity to buy a leader in a new MegaShift that is going to be huge. I have waited literally a year to recommend this stock to you, and once or twice I thought I’d missed it as it took off in a brief flurry. But now it is back selling near its 52-week lows, and on Monday the company made a crucial product introduction at the Consumer Electronics Show. And Wall Street totally misread it. Heck, they moved the stockdown on the day that I think people will look back on as the most crucial news in the company’s history.
R2D2, C3PO, Meet Roomba
During one of Ross Perot’s ill-fated runs for the White House, he did a TV infomercial that included holding up a list of the 10 key technologies required by the modern world. His implication was that the U.S. was sadly behind, but I got the list and discovered that we dominated nine of the 10 technologies. The 10th was robotics, where Japan led and we were #2.
Industrial robotics has long been a tough business in this country. I’ve been following these stocks for over 30 years, and have owned machine vision, assembly and test robot stocks from time to time. With the notable exception of Cleveland-based Morgenthaler Ventures, most of the venture capitalists that waded into this area got their heads handed to them. Like I said before, Japan has established a big lead in this area, and I have little interest in backing a company that has to go up against that sort of commanding lead.
But the revolution in consumer robotics is just getting underway, and that is where our opportunity lies today. Japanese consumer robotics products tend to be things like animatronic dogs that you have to “feed” — I am not making this up. Sony recently, uh, euthanized this product line. But one U.S. company has gone right for a practical application with this technology — iRobot (IRBT), which I mentioned in the March 9, 2006, issue: “I’m working on a new Robots MegaShift, where both iRobot (IRBT) and Intelligent Surgical (ISRG) should give us attractive entry points for another MegaShift that will grow strongly in 2006 even as the rest of the economy slows.”
Since then, Intelligent Surgical stock ran up and then fell back down to last March’s levels, and due to the number of momentum players in the stock, I think that it would probably be hit pretty hard in a market decline. But IRBT did little but decline through August, rally a bit, and then resume its decline.
In the December 7, 2006, issue, I mentioned iRobot’s products as great holiday tech gifts: “If you know someone who loves to vacuum, do not give them a Roomba or a Scooba. The Roomba vacuums floors and rugs, and takes itself back to the recharging station when necessary.
“Models range from $150 to $350, depending on features, but I personally want two: The $300 Roomba Discovery for Pets to follow my Great Pyrenees around all day, and the $130 Dirt Dog Workshop Robot that will pick up nuts, bolts, nails, wood shavings and various other junk from my shop/garage floor.
“The Scooba 5800 is a bagless floor washing robot for hard-surface floors. It runs around the room sweeping up dirt, washing, scrubbing and drying in one pass.
“It cleans 250 square feet on a single tank while the human is doing something more interesting. It costs $300, and the bigger 5900 model that cleans 500 square feet costs $400.”
I also noted that while I was following iRobot last year, the stock was almost cut in half. But it was still selling for 65X 2007 earnings, and based on that, I said that I would like to see it trading around $15 to start building a position.
Although I’d still rather be recommending the stock at $15 (IRBT closed today at $18.09), at the Consumer Electronics Show this week iRobot made an amazing announcement: “iRobot will take advantage of the robot hobbyist craze by extending its line of popular Roomba vacuum-cleaning robots. The new model, iRobot Create, uses the Roomba’s base sensors and motor but is completely user-programmable. The $129 model, available now, is a platform for hobbyists to create anything from a hamster transporter to a servant that will fetch a drink for you.”
Why Is This So Important?
I was in Silicon Valley at the beginning of the personal computer revolution, and my subscribers made a tremendous amount of money in PC, peripheral and software stocks. That industry developed out of hobbyists taking the early Intel microprocessors and a soldering gun, and making all kinds of fascinating and weird products. It was a time of tremendous ferment. You may not remember Corona Data Systems, Vector Graphic, Tandon or Domain Technologies, but these were headline-making companies for a while.
Software companies often try to recapture that exciting process today, by publishing Application Programming Interfaces that let other companies develop products to piggyback on the core product. AutoDesk is a past master of this, with something like 3,000 companies leveraging the AutoCad software with add-ons, graphics libraries, training and so on. When a company can develop that kind of ecosystem, the total effort becomes a massive barrier to entry to new competition.
iRobot is going to do the very same thing in consumer robotics. At $129 for the iRobot Create, we’ll probably see eighth-grade science projects based on it. Thousands — and maybe tens of thousands — of hobbyists and engineers are going to pounce on this to make thousands of products. Most of them will be failures, silly, or of little interest to others. But a few will be, as Steve Jobs says, “insanely great.” I’ll bet iRobot gets the first shot at marketing them. What IRBT has done will dramatically expand their R&D process by harnessing the efforts of thousands of creative individuals that they don’t have to pay — in fact, IRBT gets paid!
Fundamentals and Valuation
iRobot Create is a great idea, but whether this is a good entry point for the stock in the short term depends on the current business, fundamentals and valuation. iRobot began with robots for government security, law enforcement and the military, and they still operate in those markets. These robots mostly are meant for bomb disposal and reconnaissance. Their PackBot Scout is a mobile robot for military use in urban areas, while their PackBot Explorer does battle damage assessment and real-time targeting in inaccessible areas. The PackBot EOD is the ruggedized bomb disposal robot than can also handle hazardous materials or search-and-surveillance. iRobot sells the PackBot EOD to SWAT teams, bomb disposal units and other law enforcement and military customers, and there are over 500 units on duty in Iraq and Afghanistan. iRobot also makes an unmanned vehicle, the R-Gator, which can scout, guard or carry packs, supplies and ammunition on the battlefield. This Industrial and Government segment of the company is quite profitable and throws off quite a bit of cash. This segment of iRobot’s business adds a reliable revenue stream that offers some stability to the stock.
The Home Robots segment, which I am most interested in, sells consumer robots and offers faster growth with much bigger potential markets. Thanks to the company’s expansion into this market, it has been growing rapidly, from sales of $54 million in 2003 to $95 million in 2004 and $142 million in 2005. They should report about $190 million for 2006, up almost 34%, and then hit $250 million this year, up another 32%. Growth will continue at 25% to 30% for a few years.
iRobot will report about 12 cents a share for 2006, including an expected eight-cent loss in the December quarter. That is up just a bit from 11 cents in 2005, but I’m looking for 30 cents this year (even after a 16-cent per share loss in the March quarter). At today’s closing price of $18.09, the stock is selling for 54X this year’s estimate. That’s not cheap, but the total market capitalization is only $425 million, less than two times my 2007 sales estimate. That is cheap. Clearly, the company needs to get their profitability up, but like many leaders in new areas, they also need to spend enough money on marketing and R&D to build a big moat around their business. That’s where they are right now, and I don’t mind the depressed profitability for a while as long as sales keep growing rapidly.
The Consumer Electronics Show also gave me a peek into their competition. Microrobot is a South Korean company with the Ubot, which is already on the market in South Korea. It sweeps, vacuums and mops, but only does hardwood floors that have been imprinted with a special ultraviolet ink. Condo developers in South Korea install these floors and then throw in a Ubot to sell the condo. The Ubot is about twice as tall as the Roomba, so there are fewer places it can go. And it sells for $1,000, because it has navigation memory instead of the random pattern Roomba uses. Microrobot is promising a Roomba-size robot at a Roomba price that can do carpets, targeting an October introduction. We shall see how they do, if they ever get to market, but Microrobot is no threat to iRobot at this time.
The other competitor is privately-held Floorbotics, which is planning to introduce a Roomba competitor sometime this year. Their Cleanmate and Infinuvo models also will navigate, with a built-in floor mapping system, and should be able to finish a job faster than Roomba. Of course, iRobot undoubtedly is working on a navigation add-on, not to mention a couple of hundred Create programmer hobbyists.
iRobot is a clear leader in the Robotics MegaShift, and their emphasis on consumer robotics gives them the opportunity to become not only a very big company but a revolutionary one. Buy IRBT under $19 for a $38 target.
Avian Flu MegaShift
Concerns about H5N1 picked up this week as a 14-year-old boy died in Indonesia on Wednesday. Vietnam said that the flu is back after a year-long break, and China said that a farmer survived the virus and was released from the hospital. The flu season is just getting underway, and we can expect accelerating reports for the next few months.
BioCryst (BCRX) named a new CEO, as planned. He is Jon P. Stonehouse, the former senior vice president of corporate development at “German” Merck KGaA, where he managed global licensing and business development, corporate mergers and acquisitions, corporate strategic planning and alliance management. He had previously worked at “American” Merck and AstraZeneca and has both product development and marketing/sales experience. It looks like a very good choice and is effective immediately. BCRX is a Top Buy up to $19 for my $30 target.
Biotech MegaShift
Biogen-Idec (BIIB) has been stuck around $50 for a month. I still think the safest thing to do with the LEAPs is to sell the January 2007 $45 LEAP call (IDKAI) and roll the money into the January 2008 $45 contract (YZUAI) under $12 for my $23 target, or higher. However, I know that some of the ’07 contract holders want to gut this one out. The options expire a week from tomorrow, and I think the odds are that they will be slightly higher this time next week, so if you are not planning to roll them, the second best alternative is to hold them and sell them next week. A quick market break could steal all the value from these, which is why rolling them into the January ’08 contract, is the better alternative.
Content on Demand MegaShift
Silicon Image (SIMG) was the unseen hero of the Consumer Electronics Show (CES) and Macworld, as the HDMI interface was everywhere at CES and also inside the new Apple TV media center box. One of the stars of CES was a 108″ LCD TV from Sharp — with HDMI, of course. Global demand for LCD televisions will rise from 42 million units in 2006 to 69.7 million this year, according to market researchers DisplaySearch. By 2010, LCD television shipments are expected to rise to 128 million units — every single one with HDMI on board. Silicon Image won’t make every one of those chips, and may not even get royalties on every one, but will still be the dominant supplier of HDMI solutions.
The stock has settled around $13 and should start moving up as orders start picking up with demand. I am moving it from a hold to a buy under $13, and increasing the target price $2 to $20.
Telkonet (TKO) got a $200,000 consulting contract with the Patent Office to advise them on implementing the transition to Internet Protocol version 6 (Ipv6) and network security. What does this have to do with Broadband over Power lines? Telkonet’s Government Systems Group is going to be a main channel for BPL sales, and they bid on these kinds of contracts to develop customer relationships, understand leading edge technologies, and look for places to recommend BPL.
The company also announced that it will begin deploying BPL systems to Navy and Marine Corps locations before the end of January, under the big EDS contract approved last year. This is going to be a major thrust for the company in 2007, and I am expecting lots of positive press as these are ordered and go into service. TKO remains a Top Buy up to $5 for my $15 target.
New Energy Technology MegaShift
Oil prices are plunging, cleaning out all the bulls in a typical market move that happens before major reversals. Crude oil prices dropped 8% in the first week of trading in the New Year, and are back to the levels of June 2005. Yes, the temperature is abnormally warm from Boston to Washington and, for that matter, in California. This was also the warmest December in New York’s history. Global warming or not, that won’t last. Yes, Iran has brazenly defied the U.N. and the U.S. with little repercussions so far. That won’t last either. Most important, the dollar has been strengthening for a few weeks, which cuts the legs out from under all commodity prices. Unfortunately for our country, that won’t last either.
The mad dash to get out of oil at lower prices is the mirror image of the mad dash to get in when prices were north of $70. The real fundamentals of more oil demand from China and India, declining production from older oil fields, mediocre results from newly drilled fields and the Fed’s assault on the dollar are bound to take oil much higher, probably soon. Royal Dutch Shell (RDS.A) and Holly Corp. (HOC) are back around their buy limits, although probably not for long. Gasco Energy (GSX) has been especially hard-hit, as the moves in natural gas prices are a magnified version of what’s happening in crude oil. As we have seen repeatedly, the snap back in gas prices can be just as extreme as the current decline.
Demand for oil and gas has been weaker primarily due to the strange weather, and supply has been excessive because Nigeria and Iran are still pumping, while Saudi Arabia and the rest of OPEC are not really following through on their tough cutback talk. But I suspect $55 oil will get their attention, and they really will cut now — perhaps just as Nigeria and/or Iran flare up again, or the Alaskan air moves in.
Video iPod MegaShift
Unless you’ve been under a rock for the last two days, you know that Macworld introduced us to the Apple iPhone, which is either a phone that plays your music and takes pictures, or a widescreen iPod that lets you make phone calls. Either way, it’s a neat product, with two legal problems. First, Cisco Systems owns the trademark “iPhone” and ships iPhone products from its Linksys division. They’ve been in negotiations with Apple, and their latest offer the day before the announcement was never replied to by Apple, so yesterday Cisco sued. Second, Burst.com (BRST) owns the technology to deliver video to the iPhone, and Apple hasn’t settled that lawsuit, either. Maybe Steve Jobs thinks he’s operating on a reality plane above the law — d’ya think? — but these are two real suits that can lead to injunctions.
Regarding Burst, Gerry sent an email: “A while back you sent me a promotional email recommending BRST, indicating that this tip would be profitable, thus obtaining a new subscriber for life. I bought at $1.70 and it is now $1.15. Is this still a hold?”
Gerry, I originally recommended BRST with a $1.10 buy limit and later bumped it to $1.15. The stock closed at $1.35 today, so I assumed all subscribers held it at a profit — with more to come. The direct answer to your question is that BRST is still a buy on dips under $1.15, a hold at current levels, and my target is still $2 after Apple settles the lawsuit or buys the company. If I was a top executive at AAPL and the stock was near $100 a share, I’d sure use one or two million shares to buy out BRST, especially if there was a real chance that the CEO might be resigning soon to fight his backdating battles.
WiMAX MegaShift
Sprint announced that their first WiMAX deployments will be in Chicago and Washington, D.C. Motorola will provide the equipment for Chicago, as expected, but in a bit of a surprise, Samsung will do Washington. Motorola said that they are planning for 1,000 access sites around greater Chicago. Samsung will announce their details later, and this week Nokia also said that they will be part of Sprint’s deployment.
Subscriber Gary pointed out that: “Nick Tredennick of the Gilder Technology Report believes WiMAX will have an uphill battle achieving affordability before being overwhelmed by WiFi deployments. He writes that ‘WiFi builds for volume and WiMAX builds for performance…..Volume wins.’ This seems a little nearsighted to me since I believe there is plenty of room for both 802 standards. WiMAX appears to be the clear winner for backhaul, stationary point to point, and possibly rural mobile. Any comments?”
I like Nick. If you sign your name and then hold it up to a mirror, it will appear backwards. If you then spend many hours copying and practicing what you see, you will be able to quickly and accurately sign your name backwards. You gotta love anyone geeky enough to spend hours learning to do that, as Nick did.
Nick and George Gilder are religious about Qualcomm’s CDMA standard for 3G, or third generation, cellular networks, so when Sprint Nextel started referring to their WiMAX network as 4G, it was bound to arouse their ire. Especially since Sprint will complete its nationwide rollout of its 3G CDMA 2000 EV-DO network this year. EV-DO is a relatively slow and expensive way to access the Internet — interestingly, it is the communications standard build in to the new Apple iPhone. Sprint is moving fast to completely replace it with the WiMAX network, which is scheduled to be nationwide by the end of 2008.
Essentially, for the last three years Nick and George have taken any opportunity to bash WiMAX. But it is clear that Wi-Fi will never be useful for the three applications you mentioned: backhaul, stationary point-to-point (over 100 yards) or rural mobile access. It is also unlikely to be useful for urban mobile access, especially in a car, or rural fixed access, due to the cost of installing so many repeaters. Wi-Fi as a fixed point urban or suburban feeder technology to a WiMAX network makes sense. One of the big reasons why I like MobilePro (MOBL) so much is that all those Wi-Fi municipalities can easily be fed into a WiMAX backbone instead of a fiber cable, and the WiMAX backbone can easily pick up all the outlying areas and eventually capture mobile traffic. Think of a future iPhone that has Wi-Fi and mobile WiMAX capability, making VoIP (Voice over Internet Protocol) calls, downloading iTunes and iVideo segments, and communicating wirelessly with your desktop and laptop PC. That’s where all this is going.
Another subscriber, Frank, asked for advice on MOBL, in light of the stock price decline. This week, the company’s CloseCall America subsidiary acquired wireless contracts covering 7,000 customers from Telecommunications Systems, including the right to offer BlackBerry products nationwide. They paid nine million shares plus a cash earnout based on revenue over the next three years. The transaction is immediately accretive to earnings per share, so even though I don’t like to see an additional nine million shares used at these low levels, the operation must be pretty profitable to be non-dilutive from Day #1.
I think MOBL could be building up CloseCall America for a sale, with the idea of focusing entirely on municipal Wi-Fi networks, as the stock would be worth more as a pure play. We will see what they do. At current levels, the whole company is valued at less than $40 million, which seems dirt cheap for the market leader in municipal Wi-Fi systems. MOBL remains a Top Buy up to 25 cents for my 60-cent target.
Market Outlook
There’s certainly a lot to talk about this week when it comes to our MegaShifts, but on the eve of earnings season, the market continues to be tightly range-bound. The bulls couldn’t get the S&P 500 to stay over 1415 until today, and the bears couldn’t break it under 1405. Although the S&P has been exploring lower and lower downside limits, from 1410 down to 1405, I still think the next move is a break up to 1440. I am hoping it started today. But the most likely path after that is a substantial decline that will be made worse by the recent churning. As I said last November, a quick run up to 1440 and collapse back to the 1300 area would have been the best possible platform for a big bull move in 2007 and 2008. But the longer the market keeps noodling around, the more likely it is that there will have to be a decline that could last for the whole first half of 2007 before the big bull market can get started.
There is a chance the S&P could break through 1440 on this move and just keep going up to new all-time highs, if the Fed keeps pumping out lots of excess liquidity. Since the holiday season, they seem to have slowed their pace of printing money, and the dollar has rallied. That, in turn, has pressured commodity prices and stocks. If we see the dollar resume its fall just as the Fed money printing picks up, it becomes very possible that the market will just inflate up. In that event, I think the stocks we own, especially in the New Energy Technology MegaShift, would do really well.
But that’s getting way ahead of ourselves, as we have to navigate through the next three weeks of earnings reports. I will be sending Flash Alerts as necessary, if any of the results cause my advice to change.
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