The main events this week are the publication of results by Cisco Systems’ (Nasdaq: CSCO) today, Wal-Mart Stores (NYSE: WMT) on Thursday before trading, and Dell Computer (Nasdaq: DELL) on Thursday after trading. In addition, Intel (Nasdaq: INTC) is holding its regular mid-quarter update on Thursday. It can be assumed that the news will involve long-term strategic changes in developing computer processors, rather than changes in the financial guidance that accompanied the publication of the company’s first quarter results. Lehman Brothers analyst Tim Luke yesterday recommended buying Intel when it goes down, because he believes that the profit forecast of $1.16 per share this year and $1.37 next year is overcautious. He anticipates no negative news from Thursday’s update.
Texas Instruments (NYSE: TXN) will meet analysts for a similar event today. The Electronic Entertainment Exposition (E3) in Los Angeles begins today, and the market expects announcements from the two leading competitors in the games market: Microsoft (Nasdaq: MSFT), with its Xbox, and Sony (NYSE: SNE), with its Playstation.
Readers should not be alarmed at Microsoft CEO Steve Ballmer’s remarks about Check Point (Nasdaq: CHKP); perhaps they should even buy the share, because I’m confident that the second episode of the Steve Ballmer vs. Check Point telenovella will end the same way that the first episode did. On exactly the same day in May in 1998, then-Microsoft VP marketing Steve Ballmer came to Israel on a lightening visit, which made a much bigger media splash than his current visit as CEO. On that visit, he signed, together with then-Prime Minister (and current Minister of Finance) Benjamin Netanyahu on a unique and ambitious project to provide free e-mail to everyone. Under the plan, Bezeq (TASE: BZEQ) would allow the use of home telephone numbers as e-mail addresses, NetVision would provide one hour of e-mail use per month free of charge, and Microsoft would provide the e-mail software free of charge.
I haven’t received any free e-mail from Ballmer yet, but he did manage to take money out of my pocket, and the pockets of other investors, by causing the Check Point share price to drop on the occasion of his visits. During a lecture to an audience of hundreds in the Tel Aviv Hilton, which I attended, Ballmer was asked his opinion about cooperation with Check Point, which was already known at the time as a pioneer in Internet security. In a threatening tone, he suggested that Check Point cooperate with Microsoft; otherwise, Microsoft would develop essential security solutions for the Internet by itself. Within minutes of being reported by the “Globes” website, his remarks were quoted all over the world, and the Check Point share price dropped by several dollars.
After a month, Ballmer met with Check Point CEO Gil Shwed (whose name Ballmer supposedly can’t recall exactly) in New York, apologized, and said that he had been quoted out of context. When asked at the time whether it was still worthwhile investing in Check Point shares, Shwed answered that he personally was considering buying more shares, because he foresaw only strong growth in sales and profits, while threats by Microsoft and Cisco, the only major company with a real presence in the field, were having no business effect at all.
It is interesting to look at what has happened between that time and Ballmer’s second visit to Israel. Ballmer again spoke about Check Point, saying that he doubted whether the company could continue its success, and proposing cooperation. In 1998, the Check Point share was at $5, while the Microsoft share was at $22 (both prices adjusted for subsequent splits). Check Point continued to prosper without cooperation with Microsoft in Internet security. Its share has achieved a 400% return over these six years, although it rose far higher, before plunging when the boom fell apart. The Microsoft share gave only a 15% return during this period. Six years ago, Ballmer’s Microsoft shares were worth $12 billion. Despite the 15% rise in the share price, his current share holdings are worth the same $12 billion, because a year ago, for the first time in his life, he sold Microsoft shares for over $1 billion. If he put the money into short-term deposits, he earned a bigger return than he did on his Microsoft shares, because the Microsoft share is at exactly the same price as it was a year ago. Check Point, on the other hand, has provided a 39% return over the past year.
In retrospect, judging by the frequent breaches in its security, it appears that Microsoft has not made a major effort in the security field, not six years ago, and not three years ago. It’s not clear to me what they’re doing now, either, although it’s widely known that Microsoft chairman Bill Gates has marked security as target number one for Microsoft’s technologists. It turns out that, in 1998, Microsoft was fully occupied with killing someone else the then-popular Internet browser NetScape - at which it succeeded. It appears to me that Microsoft is currently occupied with killing Google, the most popular search engine but this time, they have apparently missed the boat. They won’t get away with it, because legal authorities all over the world are lying in wait, ready to shoot down any initiative they think is monopolistic. Check Point responded politely to Ballmer, saying, “We’ll be glad to cooperate with them, for the customers’ sake.” Off the record, however, they say that Microsoft’s security problems are Check Point’s living, so Check Point has no reason to help Microsoft.
You won’t find many hedge fund managers nowadays saying that they invest in technology shares, but in its current issue, “Barron’s” weekly interviews Douglas Whitman, manager of Whitman Capital, a small hedge fund, which has given its investors a 20% annual return, net of commissions, over the past decade. What’s interesting in this interview is that out of eight shares that he recommends as attractive investments, four are half Israeli, and two are also in my portfolio. He recommends Marvell Technology Group (Nasdaq: MRVL), DSP Group (Nasdaq: DSPG), Ceva (a DSPG spin-off that merged with another company), and Polycom (Nasdaq: PLCM), a video conference calls company, which acquired Israel company Accord Telecommunications, and which was even listed on the Tel Aviv Stock Exchange for a while.
His leading recommendation is Marvell, due to its current share price of around $40. Whitman says, and I of course second every word, that its management is exceptional, the share is priced reasonably, and the company is poised to break through in sales to new markets in consumer digital electronics. To those concerned that Marvell deals in hard disk chips, along with companies like Seagate Technology Holdings (NYSE: STX), which issued a profit warning, he explains that Marvell makes chips for mini-discs for MP3 and Apple Computers’) Nasdaq: AAPL) iPod devices and for mobile computers. These markets are growing rapidly.
With a expected profit per share of $1.36 this year and $1.75 next year, Whitman expects the Marvell share to rise in the next few months. Marvell will publish its quarterly results next week, on May 20. As a Cisco supplier, however, the share is likely to be affected by Cisco’s results. The presentation last week at a Hambrecht & Quist (H&Q) conference, Marvell VP finance and CFO George Hervey indicated that the company would have no trouble meeting analysts’ expectations of at least 10% quarter on quarter growth.
Whitman also likes the reasonable price of DSPG and the presence of its chips in almost every wireless telephone. DSPG is the supplier to Panasonic, which dominates the market. Whitman expects a wave of replacements of old 900-megahertz telephones with 2.4-gigahertz telephones, and a transition from old analog telephones to digital phones with many new options. He predicts this transition will boost DSPG’s sales to $181 million this year, and its profit per share to $1.06. DSPG also has $12.67 per share in cash, so its current share price of about $25 is very attractive. Whitman didn’t say so, but I say that as in the case of Marvell, excellent management is another reason for buying the DSPG share.
Published by Globes [online] - www.globes.co.il - on May 11, 2004