Stephen’s Posterous

Ian Warmerdam is the director of investments for the Henderson Global Technology Fund (ticker: HFGAX).

Mr. Warmerdam studied technology and business at the University of Strathclyde, Glasgow, Scotland and completed a postgraduate degree in investment from the University of Stirling, Scotland. His hobbies include mountain biking, hiking and windsurfing. Barron's Online recerntly interviewed Mr. Warmerdam.

Mr. Warmerdam says he was able to outperform his peers by examining niches of the stock market that show strong secular growth over time. He does this by seeing how the world is changing and how technology is influencing these changes. The fund picks companies with a sustainable competitive advantage. The fund uses a strong valuation bias that protects them to a certain extent.

The fund also uses some behavioral finance techniques, like the psychology of markets and of participants, which means using a bit of a contrarian strategy at times like avoiding an industry when it is hot and buying into a sector when is depressed.

When asked about what companies Mr. Warmerdam is currently excited about, he mentioned Tencent Holdings, a Chinese Internet company traded on the Hong Kong stock exchange (SEHK 700). The company is a leading instant messaging company in China that has a very loyal and large base of instant messaging users.

Tencent Holdings become a successful social networking company, a kind of Facebook of China, while also being successful at online strategy games.

Mr. Warmerdam also mentioned VistaPrint (VPRT), a company that offers small businesses huge cost savings in marketing and customized print materials like business cards and stationery, offering an 80% to 90% cost savings compared to local copy shops.

When asked about well known companies like Google (GOOG) and Apple (AAPL), Mr. Warmerdam said:

One of the primary themes of our portfolio construction is Internet advertising. This is a very strong secular group story. In Western markets, according to many surveys, we are now spending 30% or more of our media time online, as opposed to watching television or listening to the radio. In many cases, probably a lot more than that.

And yet Internet advertising, even in the U.S., which is a very mature market, accounts for less than 10% of advertising spent. We very much think that's a gap that is going to close over time, and additionally we are probably going to spend even more time online in the future.

Mr. Warmerdam believes that Google leads in Internet advertising around the world. Mr. Warmerdam also likes Baidu (BIDU),  the Google of China.

Mr. Warmerdam has invested in Apple since he believes the company has created barriers to entry and created a real network effect through the iTunes store and through the applications store.

In the tech area, Mr. Warmerdam is avoiding the commodity areas and underweighting semiconductors, PC manufacturers and the components market.

Source.

In Major Shift, Apple Builds Its Own Team to Design Chips
By Yukari Iwatani and Don Clark, WSJ.com

Apple Inc. is building a significant capability to design its own computer chips, a strategy shift that the company hopes will create exclusive features for its gadgets and shield Apple's work from rivals. The Silicon Valley trend-setter has been hiring people from many different segments of the semiconductor industry, including engineers to create multifunction chips that are used in cellphones to run software and carry out other chores.

Apple could use the internally developed chips to sharply reduce the power consumption of its hit iPhone and iPod touch devices, and possibly add graphics circuitry to help its hardware play realistic game software and high-definition videos, people familiar with its plans say.

In one sign of the new focus, Apple recently hired Raja Koduri, who was formerly the chief technology officer of the graphics products group at chip maker Advanced Micro Devices Inc. Mr. Koduri started at Apple this week, following in the footsteps of Bob Drebin, who had held the same title at AMD and is also now working for Apple. Online job postings from Apple describe dozens of chip-related positions it is trying to fill, some with partial descriptions like "testing the functional correctness of Apple developed silicon."

Besides a desire to beat rivals to market with new features, Apple's shift is also an effort to share fewer details about its technology plans with external chip suppliers, say people familiar with the moves. An Apple spokesman declined to comment.

The new effort faces plenty of hurdles, and people familiar with Apple's plans don't expect internally designed chips to emerge until next year at the earliest. Still, Apple's aggressive hiring is another sign of how the company's recent success has allowed it to expand while other tech giants have trimmed their work forces in the recession.

Apple's strategy also marks a break from a long-term trend among most big electronics companies to outsource the development of chips and other components to external suppliers.

In 2008, Steve Jobs explained the purchase of Silicon Valley start-up P.A. Semi as a way to acquire expertise and technology to help run increasingly sophisticated software on iPhones and iPods. "You can't just go out and buy the chips off the shelf to do that," said Mr. Jobs in an interview.

Most cellphones are based on chip designs licensed by ARM Holdings PLC to others. For the iPhone, Samsung Electronics Co. supplies an ARM-based microprocessor with custom features developed by Apple, analysts say. People familiar with Apple's thinking say executives have expressed concern that some information shared with outside vendors could find its way into chips sold to Apple competitors. A Samsung spokeswoman declined comment.

People familiar with the situation say Mr. Jobs told P.A. Semi engineers last April that he wanted to develop chips internally and didn't want knowledge about the technology to leave Apple. Mr. Jobs is on medical leave and was unavailable for comment. People familiar with Apple's plans expect former P.A. Semi engineers to help create ARM-based chips that could improve the performance and battery life of future iPhones.

Apple's hiring spree in semiconductors started well before the acquisition and has continued through the past few months, according to postings on the networking site LinkedIn. The site contains more than 100 people listing current Apple job titles and past expertise in chips, including veterans of Intel Corp., Samsung and Qualcomm Inc.

Apple's own job postings, some aggregated by the site Indeed.com, provide clues about possible features to come. Two recent postings involve handwriting recognition technology; several others seek expertise in chips for managing displays.

Apple participated in a job fair earlier this month for soon-to-be-unemployed engineers at memory chip company Spansion Inc., which sought bankruptcy protection in March, people familiar with the situation said.

Nick Wingfield and Justin Scheck contributed to this article.

Source.

View from the Top, Shantanu Narayen, Chief Executive of Adobe
By Chrystia Freeland and Paul Taylor, FT.com

Shantanu Narayen, aged 45, is modest about his personal accomplishments, which include holding five patents, but passionate about technology, Silicon Valley and Adobe, the $3.6bn-a-year desktop software pioneer he now leads as chief executive.

Before joining Adobe in 1998, Mr Narayen, an electronics engineer from Hyderabad, India, who loves golf and his two sandy-coloured Labrador dogs, worked at Silicon Graphics and Apple, and co-founded Pictra, an early pioneer of digital photo-sharing over the internet.

As Adobe's president and chief operating officer until he took over the chief executive's job in December 2007, he helped spearhead the $3.4bn acquisition of Macromedia, a deal that expanded Adobe's software portfolio and strengthened the company's presence in key markets ranging from enterprises and vertical industries to mobile devices and multimedia publishing.

In an interview with the Financial Times, Mr Narayen discussed the impact of the recession on Silicon Valley, Adobe's strategy for its Flash technology, and cloud computing.

What impact is the economic crisis having on Silicon Valley and on the technology sector? Do you worry about what impact it might have on innovation in the economy?

Most companies have certainly seen a reduction in revenue and that has had an impact. Most then have to think about what they want to focus on and what it means in terms of their long-term strategic thinking.

I hope the crisis won't affect innovation. From our perspective we look at this and say it is such a great opportunity because the strong companies are going to get stronger. It has been a great galvanising opportunity within the company to focus on what we think is really important.

What about the impact of belt tightening on Adobe's culture, which has always been known for taking care of its workers?

Yes, we had a painful task of doing a restructuring in November. We decided as a management team that we really wanted to be transparent with our employees, we wanted to be in front of them and we outlined the measures we were taking. But, more importantly, we talked about the vision we still had for ourselves as a company to get people focused on the future and the vision we had for ourselves. And people responded magnificently.

Will your ability to recruit the best and the brightest young people be improved by this crisis?

There is no question that the ability to recruit right now is at its best because the number of jobs that exist in the Valley [isn't] that high. We have also done a really good job of hiring straight out of college. We love to hire scary, smart young people who don't know what they don't know sometimes.

What about salaries? Can you pay people a little less than you did?

What we did at Adobe this year was to not do a salary increase. And that was pretty consistent with most companies in the Valley. But to us it's a little less about not paying people more salaries, it's really about attracting and retaining the best.

Do you think the iPhone and other cell phones have been quick enough to adopt Flash?

Well, we'd love to see the adoption quicker. We will ship more than 1bn devices that have Flash on them. But one thing we have done is really had a lot more focus on our strategy for smartphones.

What about the competition between Flash and Microsoft, in particular Microsoft's Silverlight?

Adobe has done a fantastic job of changing how video is viewed on the web. About 80 per cent of the video you see on the web today is actually in Flash. Our big customers include the NBA, the NFL - and Major League Baseball just moved to Flash in time for the opening season - and the BBC. So, we continue to think we're innovating at a pace that is greater than the competition and that is what we have to do.

What about cloud computing? How much of a challenge does that pose to you and to the space you work in?

We believe the real opportunity we have is what we call hybrid applications - applications that combine the power of the desktop and the connectivity of the web. And we have been talking about that. We have a great platform in Flash and Air that enables developers to build applications that take advantage of these trends.

And I think the entire industry is moving towards recognising that it is not just about having computing on the cloud, but it is also taking advantage of local resources. So we think cloud is an essential part of computing moving forward, but it's not the only part.

What are the most interesting new developments in the ways people use technology around the world? What is the most exciting thing on the horizon?

I just think it's ubiquitous computing. Wherever you are, you just want access to the information and [this] introduces a whole host of new possibilities. I would also highlight collaborative computing because computing has changed from a very individual activity to a very social activity.

What about pure technology developments? Is there a particular technology you're most excited about?

Video is still such a nascent opportunity in terms of how it can be viewed on the web, so that is an area we have been focused on a fair amount.

Source.

Apple on April 22, 2009, set itself apart from most of the struggling consumer electronics sector as it reported an unexpectedly strong 9 per cent increase in revenues in the first three months of 2009, despite the depth of the recession and a lack of hot new products to draw consumers to its stores.

At the same time, the US technology company continued to offer only the broadest of responses to persistent rumours about the health of Steve Jobs, its chief executive, who has been on leave of absence since January 2009 to battle complications from an earlier bout of pancreatic cancer.

“We look forward to Steve returning to Apple at the end of June,” said Peter Oppenheimer, chief financial officer, on a conference call announcing the company’s latest quarterly earnings. Apple executives also continued to play down widespread expectations that the company is planning to launch a low-cost laptop to compete in the fast-growing “netbook” segment, which has been the only part of the personal computer business to see growth in recent months.

“For us it’s about doing great products,” said Tim Cook, chief operating officer. “When I look at what is being sold I see cramped keyboards, terrible software, junky hardware. It is not a space that exists today that we’re interested in.” However, he added that Apple was still studying the new market segment and did not rule out a product of its own.

The company’s latest figures were buoyed by strong sales of the iPhone, as well as the iPod touch, a version of the portable music player that can access the internet over WiFi networks. Strong consumer interest in downloading applications from Apple’s online store, launched in the middle of last year, accounted for the unexpectedly strong interest in the devices, said Mr Cook.

Demand for the handheld devices offset a weaker showing than expected from Mac computers, as the professional and educational markets experienced a sharp retreat, despite more resilient sales to consumers, the company said. Overall, Mac sales fell by 3 per cent to 2.22m units, a stark reversal from a year before, when the launch of the Macbook Air led to a 53 per cent jump in unit sales.

Apple’s latest earnings were also helped by falling prices of computer memory and other components, which led to an unexpectedly strong bounce in its profit margins. Gross profit margins jumped to 36.4 per cent, from 32.9 per cent a year ago. The improvement also reflected a shift in the mix of the company’s sales towards more profitable products.

Component prices were likely to remain in the same range in the current quarter, said Mr Cook, suggesting that Apple’s next set of earnings will also benefit from the lower costs.

The higher than expected sales of the iPod put paid to widespread expectations that this would be the first time in the device’s eight-year life that sales fell from one year to the next. Apple said it had sold 11m of the devices, up from 10.6m the year before.

The company said that revenues in the latest period had risen to $8.16bn, compared with Wall Street forecasts of $7.95bn. Net income rose 15 per cent to $1.21bn, or $1.33 a share, compared with forecasts of $1.08.

Apple issued a downbeat forecast for the current quarter, with revenues estimated at $7.7bn to $7.9bn and earnings at $0.95-1.00 a share. However, its shares edged up more than 3 per cent in after-market trading.

Source.

Fund manager Richard Parower is proving that it is possible to generate bull market returns even in a tough investment environment.

Parower is the portfolio manager of the Seligman Global Technology Fund (ticker: SHGTX), which recently earned a five-star Morningstar rating.

So far this year, the fund has generated total returns of 15%, outpacing its benchmark by 5.4 percentage points and the Standard & Poor's 500 by 23 percentage points.

So what's the winning strategy? It's pretty simple. Parower sticks to the No. 1, 2 or 3 industry players that can generate double-digit earnings and revenue growth. In this economic downturn, he looks for companies that have defensive cash flow and earnings power.

In addition to constructing financial models and dissecting trends, Parower travels to get a sense of what products and services are hot. In places like India, China and Taiwan, he visits companies, Internet cafes, looks for advertising campaigns and does a lot of people watching to see what mobile phones they use.

Parower recently discussed his investing approach with Barrons.com.

Q: Some technology chief executives have been saying over the past several months that an economic recovery will be led by the tech sector. Do you agree?

A: Generally, I agree with that. I don't want to get too complacent about that though. The reason why we are thinking that technology should lead out of the cycle is the proper application of technology generally helps companies reduce costs and makes them more efficient.

These are usually rapid return on investment projects. For instance, with systems-management software it ends up being a way to reduce the overhead cost of your IT [information technology] department using zero people to manage that many more resources.

Q: Overall tech spending has been on the decline. Where are the bright spots?

A: If we look at the enterprise [side], what has gone on so far this year and to a significant degree last year as well, corporations are being very careful about what they are spending. They are spending on things like security, risk and compliance. We've owned some of the storage names like EMC (EMC) and NetAPP (NTAP).

As this year progresses, the real surprise at the beginning of this year has been this inventory restocking that has gone on in the hardware food chain. They got caught shorthanded in terms of the comfort level of the components they had on hand to meet end demand. It doesn't mean it is getting better, but it has just stabilized.

Q: What are you seeing on the consumer side?

A: The consumer generally is still pretty tough at this point. One interesting thing that is going on with the consumer, and I kind of laugh about it, is flat panel TVs are doing really well.

Q: That's a surprise.

A: Exactly, you would figure in this more frugal environment that they wouldn't be doing that well. But I guess people decided, "Well, I'm going to stay home more, and I want a big TV to stay home with." But really what it is, too, is there has been very competitive pricing at retail and so TVs have generally done pretty well.

The numbers have been good so far this year in the U.S. In China there is a stimulus program that tends to work actually relatively quickly where the government is subsidizing purchases of things like handsets, low-end PCs, TVs up to a 32-inch panel, major appliances such as refrigerators and stuff like that, mostly outside of the Tier 1 cities.

Q: What companies are benefiting from these flat-panel sales?

A: We've owned some of the Asian names: AU Optronics (AUO) is not one of our top holdings, but it is one of our bigger holdings in Asia and they're a panel manufacturer. We've also owned some LG Display (LPL). With demand picking up they are able to crank up their factories more, cover their fixed-costs better. Pricing was actually modestly improving at the beginning of this year.

Q: What's driving security and what are your favorite stocks?

A: Security is one of those areas that if you are a corporation or a consumer you end up having to continue to spend on it, because there are always new bad guys or bad guys trying different ways to hack into your enterprise or to get access to things like your social-security number at home, credit-card information, bank information. New attacks make for a new demand or for new products from the security-software vendors.

We like three of the bigger players in security: McAfee (MFE), Symantec (SYMC) and Check Point (CHKP). One really good feature about that part of the security-software business is that they get their customers to sign up as subscribers. Most enterprises will re-sign with the same security vendor, and so you have this recurring revenue stream that generates nice consistent cash flow.

You still have Symantec, even today, trading at under 10 times free cash flow. You have McAfee, which is a better growth profile right now, trading probably somewhere around 11 times free cash flow. This is for calendar '09. Check Point's earnings and free cash flow are pretty similar, "[but they aren't] as big on the subscriber side as McAfee and Symantec. But Checkpoint is trading at about 8.5 times calendar '09 earnings.

Q: What is a good way to play risk and compliance?

A: In risk and compliance the companies that we like in that space are Open Text (OTEX), a Canadian company. They do content-management software. When a company gets sued now, there are e-discovery requirements. It is not just e-mails, it's instant messages, it's any content across the enterprise. And it is not just finding [the content], it is getting it into a database and getting it deliverable and searchable.

Q: Are you expecting further earnings downward revisions or are earnings hitting a trough?

A: I think we are getting pretty close to the trough here especially, knock on wood, for the companies that we own in the portfolio. We would not typically own a company where we thought we were going to have a negative revision. In general things are stabilizing. The business environment is stabilizing, that's what we are hearing from salespeople, and that's what we are hearing from the buyers as well.

We are starting to hear more noise about M&A [mergers and acquisitions] and that's actually a good sign. Obviously, we saw IBM (IBM) and Sun Microsystems (JAVA). I think Sun was crazy not to take that deal [with IBM] because I don't think there is going to be a better offer.

Q: Do you think Sun is good as a stand-alone company?

A: No. We don't own Sun. We are not very positive on the company. We don't think they're terribly well positioned in servers. They have some interesting products in software, but they don't make that much money in the business and they are not going to be a big player in it.

Q: What do you think about the prospects of Apple (AAPL) as a company and as a stock?

A: Over the past 12 months, we've seen things like the iPhone and the iTouch really start to take off because of the App Store. [The store's applications] can only be delivered to an Apple device, and the Apple devices are very attractive. So I think that model continues its virtuous cycle.

We believe there is going to be new lower-cost version of an iPhone later on this year. There is going to be certainly some new notebook products as well from Apple, and we do think they'll continue to do well. We are still pretty happy owning [the stock] at this point.

Q: What do you think about the flurry of netbooks being released? Is it a growth driver for PC companies?

A: It is sort of a catch-22 for most companies because you are selling a notebook for $300 or $400 instead of selling one for a $1,000. It does expand the market, but a certain part of the market it certainly cannibalizes for companies like Hewlett-Packard ([HPQ) and certainly Dell (DELL).

It is a big issue because Dell is not that good in notebooks to start with. To now have a lower selling price for a product that you are not really competitive in, where all the growth in the market is, becomes a big problem for them.

The one way to play netbooks and get good positive leverage in terms of earnings and revenue growth from netbooks is Acer, which is a Taiwanese company. Quite frankly, we have been lightening up on it some, but it is one of the things that we have played.

Q: What tech areas are you avoiding right now?

A: Communication equipment in general, so the infrastructure guys we are avoiding at this point. The telcos are not buying that much equipment right now. IT services are generally a late-cycle play in technology; that also means that when things start to rollover, it is one of the last things to rollover.

Q: Thank you.

Source. Subscribe to Barron's. Seligman Global Technology Fund.

More than three months into a medical leave from Apple Inc., Chief Executive Steve Jobs remains closely involved in key aspects of running the company, say people familiar with the matter.

Chief Operating Officer Tim Cook runs the day-to-day operations at Apple, these people say. But Mr. Jobs has continued to work on the company's most important strategies and products from home, they say. He regularly reviews products and product plans, and was particularly involved in the user interface of the new iPhone operating system that Apple unveiled last month, these people say.

Apple co-founder Mr. Jobs, who is considered the company's creative leader, is also involved in the development of future projects, they say. People privy to the company's strategy say Apple is working on new iPhone models and a portable device that is smaller than its current laptop computers but bigger than the iPhone or iPod Touch.

Mr. Jobs, who was treated in 2004 for a rare form of pancreatic cancer, took a medical leave in early January, saying he would return in June and would remain involved in "major strategic decisions while I am out." But he has made no public appearances or statements since then, and it has been unclear just how involved he continued to be. Apple has been mum about how Mr. Jobs's absence is affecting daily operations.

Mr. Jobs didn't respond to requests for comment. Apple spokesman Steve Dowling said: "Steve continues to look forward to returning to Apple at the end of June."

Apple's fortunes appear to be linked in shareholders' minds with the health of Mr. Jobs, and Apple stock has suffered since last summer on speculations about his condition. At the same time, Apple has strenuously argued that its management bench is deep, and that while Mr. Jobs is integral to the company and its fortunes, Apple isn't wholly dependent on him.

Information on the health of Mr. Jobs, 54 years old, has long been scarce and contradictory. He has said his cancer treatment five years ago was successful while maintaining that his health is "a private matter."

But concerns among investors mounted, and the share price wobbled, after Mr. Jobs appeared in public looking noticeably thinner. The day after Apple announced in December that Mr. Jobs would not speak at the Macworld trade show, where he had been the keynote speaker since 1997, Apple shares fell as much as 8%.

In early January, Mr. Jobs said he had a hormone imbalance that was "relatively simple and straightforward" to treat and that he would continue as Apple's CEO. About a week later, he announced that the issue was more complex than he had thought, and said in a letter to employees that he would take a leave. He provided few details of his illness, raising concerns that his cancer may have returned.

In an interview last month, Philip Schiller, Apple's head marketing executive, declined to comment on how the company was faring without Mr. Jobs. "We're just trying to do what we do every day," he said.

People familiar with Apple's operations say they still expect to see Mr. Jobs return in June. Some of these people also say members of Apple's board of directors are monitoring the situation directly, communicating regularly with Mr. Jobs's physicians.

People inside the company, business partners and others who are familiar with the situation say life at the Cupertino, Calif., company remains much the same as it did before.

Those at other corporations who deal with the company also say their interactions with Apple haven't changed. Mr. Cook, who had already been handling most of Apple's day-to-day operations, has kept tight control over the company, say business partners and those inside Apple.

Concerns among employees have also eased as its stock price has bounced back, rising 40% since the end of last year, compared with an increase of about 5% in the Nasdaq Composite Index over the same period. Shares of Apple closed at $119.57 on April 9, 2009, up from $85.33 in January when Mr. Jobs announced his leave.

Apple's business has proven relatively resilient to the recession so far. Analysts on average expect the company to have increased its revenues by 5.9% to nearly $8 billion in its fiscal second quarter ended Mar. 31, according to a survey by Thomson Reuters, helped by the launch of new desktop computer models and a smaller iPod shuffle music player. The company will report its quarterly earnings on April 22.

In spite of Mr. Jobs's plan to return, some employees, business partners and investors are considering what Apple would look like if he doesn't. People familiar with Apple's operations have said Mr. Cook and the other veteran executives understand Mr. Jobs's thinking and have a product road map for the next several years. But these same people worry about the period beyond.

Job recruiters say they aren't seeing significant employee turnover at Apple. But executives at several Silicon Valley companies say they are getting more interest than before from Apple managers, particularly those in the mid-to-upper levels. Most recently, Greg Dudey, one of the lead engineers for Apple TV software, left the company to work for Dell Inc. Mr. Jobs's health is not necessarily the driver of such job moves, according to these people.

Shaw Wu, an industry analyst at Kaufman Bros., says investors are prepared for the possibility that Mr. Jobs could play a reduced role. "Most investors have factored in a management transition," he said. "What people are expecting is that Steve Jobs would retain a chairman role, and Tim Cook would formalize his role."

Source.

This may be a great time to add shares of Amazon.com to your shopping cart and proceed to checkout.

The stock makes sense because the retailer itself makes sense to smart shoppers. They don't waste valuable gas fighting for a parking space in a massive mall parking lot; they find prices that compete with Wal-Mart's and flirt with the Web's biggest bargains; and they can easily peruse a vast array of merchandise, ranging from gigantic TVs to Elmore Leonard novels to disposable razors. What's more, their purchases tend to get delivered as promised.

The many benefits of the e-tailer's business model are even more apparent in tough times. Amazon's highly automated and centralized operations run at a lower cost than those of traditional retailers, allowing the Seattle company to pass on significant savings to its customers. Rather than truck merchandise to thousands of stores from myriad distribution centers, Amazon picks and packs its items from computerized warehouses where they are shipped direct to a customer's house, just the way founder Jeff Bezos envisioned.

No stores means fewer layers of expense for real estate, employees, inventory and utilities. While traditional outfits like Circuit City and Linens 'N Things have gone belly up, and speculation mounts about the staying power of household names like Sears (ticker: SHLD), among many others, Amazon.com (AMZN) had a strong Christmas season and free cash flow that rose 16% for 2008.

"A lot of consumers are migrating to Amazon," says Walter Price, a veteran technology investor from Allianz Global Investors. "It simply has a better retail model, and it is only getting better," and Bezos has added a couple of kickers, which Price views as options on two nascent Amazon businesses that aren't reflected in the share price.

The e-commerce pioneer always has been pragmatic in finding ways to leverage its operations by running portions of other companies' businesses, from Website check-out services to logistics.

Now, Amazon is taking that a step further by providing Web services, better known these days as "cloud computing." What is cloud computing? It is the outsourcing of information-technology and data-center operations to third parties, mostly by small- and medium-sized companies that choose not to spend their resources to deal with these tasks themselves.

The name cloud derives from the remote ether-like computer space where the outsourced operations take place. Amazon, which has spent more than $2 billion on its systems in the last decade, has divided these services into several parts, including: Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage).

Price believes these services could eventually generate hundreds of millions of dollars annually and investors are getting them for almost nothing.

The second kicker is Kindle, a digital-reading device. Its original version was generally well received, but its recently released 2.0 edition has become a hit with consumers. Wall Street analysts estimate the company has sold 350,000 of the devices, which got a plug from Oprah Winfrey last fall. A Kindle runs $359, and it not only generates revenue but protects and promotes Amazon's original business of selling books.

Of course, Amazon's financial performance hasn't gone unnoticed. With a forward-looking price/earnings ratio of 39, you may feel as though you are paying retail for the shares. But valuing them on a cash-flow basis is a more accurate gauge because it takes into account the company's unusually long float period, which allows it to use the cash as working capital.

At a price of 70 on Friday, March 27, 2009, the shares sell at roughly 20 times the company's free cash flow of $1.36 billion, or $3.18 per share, in 2008. That is less than Wal-Mart 's (WMT) free cash flow multiple of 22.6 and Costco 's (COST) 25.4.

Allianz's Price expects free cash flow to grow about 20% annually going forward, without taking potential revenue growth from Kindle or Web services into account. He believes the shares could crack 100 in two to three years, while Piper Jaffray research analyst Gene Munster has a more modest 12-month target of 81 for the stock.

Amazon's business model for billing, inventory and delivery gives the company some unique financial advantages over other retailers. It can carry customer payments on the balance sheet for up to 26 days before it must pay suppliers. The float on that money can help to lower pricing and gives Amazon still more power to grab market share.

"We have a negative operating cycle," Chief Financial Officer Tom Szkutak told investors at a recent Morgan Stanley conference. "So, as we grew, we generated cash from working capital. And we are all about maximizing profit dollars, not individual margins," he said.

"It isn't unreasonable to expect that revenue could double over the next three years," says Price, barring a complete collapse of the economy. Amazon reported 2008 profit of $1.49 a diluted share or $645 million, up 36% from the prior year on $19.17 billion in revenue for fiscal 2008, which was up 28% from 2007.

Because of its other advantages, the e-commerce company tends to follow others' prices without necessarily trying to beat them. "We really want to offer low prices every day...[but breadth of] selection is very key to growth," Szkutak told the conference. Not only does Amazon carry more product categories than ever either through its own e-tail operations or third-party retailers on the site, it also offers more brands and styles per category.

Amazon's strong balance sheet and wide selection stand out even more in this wretched retailing environment, where malls find themselves losing tenants, and tenants find themselves with less and less inventory. Retail sales generally stagnated in 2008 and have dropped nearly 10% for the period December 2008 through February 2009 over the same period a year earlier. With the exception of Wal-Mart, drugstores and warehouse clubs, just about every retail business is off.

That leaves Amazon to pick up the slack. More and more consumers turn to the Web for shopping, with Amazon often the first destination. After a decade of starting their online purchases by searching on Google (GOOG), cybershoppers now make Amazon their default page, knowing that its bots are crawling the Web to identify the lowest prices.

Even e-Bay (EBAY), which tried to compete, recently shifted its focus back toward selling used merchandise. And with less than 10% of all retail sales done over the Internet, there's loads of upside. Price contends that U.S. online sales will account for as much as 20% of total retail sales within the next 10 years.

On top of that, Amazon is grabbing a greater share of online commerce as consumers realize that it is routinely price-competitive, delivers in a timely fashion, and now has arguably the greatest selection of merchandise assembled in one place, albeit in cyberspace, including Wal-Mart.

"E-commerce now starts and ends with Amazon, and eventually it will show up with higher sales," Price says. "As they get more volume, their costs relative to their prices should come down, which should improve their profits over time," he says.

Amazon is also growing overseas. It now ships in six foreign countries, including Germany, Japan and China. For the fourth quarter, international sales of $3.07 billion were 46% of total revenue.

Lower shipping costs also improve the customer's experience. In the early days, Bezos would goose sales with free-shipping promotions. Now he has implemented a "Prime Program" designed to keep shipping costs down while spurring more sales.

For $79 a year, Amazon customers get guaranteed "all-you-can-eat" free shipping on two-day deliveries for most merchandise, excluding bulky items like furniture. Or they can pay $3.99 extra for one-day delivery. Only Amazon can afford to offer those terms and still make a profit because of its huge volume and efficient inventory and shipping operations." Amazon's logistics is its secret sauce," Price says.

One of the reasons Piper's Munster upgraded Amazon to a Buy in early March was a survey his firm conducted that showed 81% of Amazon's customers are satisfied with the retailer, compared to 71% for eBay.

More important, 94% of the respondents said they would recommend the e-tailer to a friend. That score, he says, is reminiscent of Apple 's (AAPL) tally earlier this decade before the iPod, as well as Netflix 's (NFLX) rating prior to its breakthrough. In both cases the scores presaged big runs in the stocks to record highs.

"It's a leading indicator," says Munster. Goldman Sachs analyst James Mitchell was impressed by Amazon's 15% increase in year-over-year gross profit and 9% jump year-over-year in operating profit. The fact that it could grow profitably during one of the worst holiday shopping seasons ever meant Amazon wasn't just "buying" revenue via discounted pricing, noted Mitchell.

Majestic Research predicts Amazon is on track to at least meet expectations on revenue for its first quarter ending March 31, 2009, adding that sales have begun to accelerate and could actually exceed Street estimates for the quarter.

After spending billions to build the technology that drives its retail operation, Amazon, at its heart, is a tech company. As a result, it is always looking for ways to leverage operations, which is why it is pioneering areas like cloud computing. Tech researcher Gartner Research forecasts that, industry wide, this category will reach $56.3 billion in revenue in 2009, a 21.3% gain over 2008. The market is projected to reach $150 billion in 2013.

The notion of trusting your entire enterprise-computing needs to someone else is controversial and meets with resistance by big corporations. But small- to medium-sized companies, especially start-up software developers, embrace the trend. Adam Selipsky, a vice president of Web Services at Amazon, told trade publication Intelligent Enterprise that there are three reasons for companies to switch to its cloud: efficiency, economics and performance.

Start-up software companies are among Amazon's biggest Web-services clients. They can develop code and deliver software using Amazon's delivery infrastructure, paying only for the computing power they use and leaving the data center headaches to Amazon. This allows start-ups to build their businesses without a lot of upfront cost, which is especially attractive during this period of tight capital.

Amazon isn't competing with Nordstrom (JWN) or Sears in this marketplace. It's going up against the likes of IBM (IBM), Google, and Microsoft (MSFT). But Price thinks Amazon has an edge over Google, because Amazon's systems use computer languages that are more open and flexible. Plus, the company is already geared toward handling outsourcing in other parts of its operations, so adding data-center services is just a natural extension, Price argues.

Tech Crunch, an online-technology publication, estimates that 60,000 corporate customers are using Amazon Web Services. Amazon wouldn't confirm that number.

Kindle is another example of Amazon's technology prowess. The electronic book reader is arguably superior to a similar gadget developed by Japanese consumer-electronics giant Sony (SNE). It even has prompted comparisons to Apple's iPod and iTunes. Kindle allows people to carry entire libraries of digital books on one device, and it focuses their selections on Amazon's list of offerings.

It also provides potential growth from the device itself. That won't provide a huge boost to sales in the short term, but the Kindle could improve margins, says JPMorgan Chase analyst Imran Khan. For the iPod, Apple has to pay for intellectual-property rights on songs and movies; and Amazon must pay book publishers for its digital content. But both "playback"devices are proprietary.

According to some analysts, it isn't a stretch to see Kindle's estimated 350,000 unit sales hitting one million this year. Goldman's Mitchell, for one, predicts Amazon may double or triple Kindle sales in 2009 based on demand built not only by the Oprah endorsement, but by an increasingly broad range of book titles, and sales to overseas markets such as Germany and Japan.

If Amazon can build a big Kindle user base, it could raise barriers to entry in the eBook market, lower per-book marketing costs, reduce fulfillment costs, and increase revenue , all of which would lead to higher margins, Khan argues.

Needless to say, fulfillment costs on a digital download are a lot lower than those on a book delivered via an overnight shipper. Fulfillment costs took an 8.3% bite out of Amazon's revenue last fiscal year, whereas the cost of delivering an eBook would account for about 2% to 3% of total revenue.

Khan more conservatively forecasts Amazon to sell another 500,000 Kindles in 2009, adding $63 million in fiscal 2009 revenue, or two cents earnings per share. He predicts Amazon will sell 12 million eBook downloads during the fiscal year. Every two million book downloads equals about a penny a share in annual earnings, Khan says.

There is more than a comparison with Apple; there is compatibility. The Kindle reader application is now available for the Apple iPhone, which will expand Kindle's reach beyond avid book readers. Another potential boon: schools and colleges, if Amazon successfully taps the textbook market.

Of course, there are risks. Just last week the company said it would close three distribution centers, laying off or transferring 210 workers, to fine-tune its business. And whenever investors pay up for growth, there is always the chance that revenue can disappoint.

Amazon is hardly immune from the crash in consumer spending. If it gets much worse, the company will surely suffer. As it becomes a more global entity, foreign-currency swings can have a negative impact on revenue, too.

During the dot-com boom, shopping over the Internet was an exotic experiment. Today, Bezos' Amazon has created an experience that is often more satisfying than shopping at an understaffed mall store with depleted inventories. With more selection, less hassle and faster checkout, and with competitive pricing thrown in, you have the world's best retailer, albeit one whose shares trade at a technology multiple.

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The Netflix stock-price bubble may be close to bursting. The DVD mail-order business's stock has doubled since November, taking it to a rich valuation of 26 times estimated 2009 earnings, a loftier multiple than either Google or Apple.

The impetus for the stock surge was Netflix's recession-era appeal, demonstrated by its strong subscriber growth. But the rally was juiced by investor enthusiasm for Netflix's instant-watch streaming service, which lets DVD subscribers stream movies or TV shows for no extra charge. Then came reports on March 3, 2009, that rival Blockbuster could be facing bankruptcy, pushing the stock even higher.

Investors may be getting ahead of themselves. First, Blockbuster appears to have averted catastrophe, disclosing Thursday, March 19, it had struck a deal with some of its biggest lenders to extend a smaller version of its revolving credit line through to September 2010.

More important, Hollywood studios appear to be waking up to the threat posed by Netflix's instant-watch service, which the company says is being used by millions of its subscribers. That almost guarantees that studios will look to renegotiate Netflix's content-supply deals on tougher terms.

At the same time, some of the studios are pondering their own online movie- or TV-subscription services. Walt Disney has already flagged it is contemplating such a step.

Competition is intensifying. Amazon.com's movie-database site, IMDb, is expanding a free ad-supported streaming service for TV shows and movies. IMDb had 19.8 million unique U.S. visitors in February compared with 14.4 million for Netflix, according to comScore. Netflix fans take note: A correction is looming.

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Even though Caris & Co. estimates are well below consensus, and they expect tight and reduced enterprise information-technology budgets and weak consumer spending to sharply slow Research in Motion's (RIMM) year-over-year growth in handsets and subscriber additions in calendar 2009, i.e., Caris & Co. sees BlackBerry continuing to post solid organic growth as one of the best-positioned platforms in smartphones, increasing share of the cell-phone pie.

Caris & Co. believes Apple's (AAPL) iPhone is actually the new gold standard, but with Research in Motion's stock more than 70% off its highs and trading at just about 12 times our calendar 2009 estimated earnings-per-share forecast of $3.26, combined with a solid balance sheet with net cash of more than $4 per share, they initiate coverage at Buy and see about 50% upside to a $60 target.

Although global handset units may shrink about 15% in calendar 2009 to 1.0 billion, Caris & Co. estimates smartphones grow from less than 12% to 15% of the mix, with their model that Research in Motion gains 3-4 more percentage points of smartphone share to about 20%, which would still be just about 3% overall.

Caris & Co. sees macro growth driven by: a) faster 3G wireless networks; b) handhelds now true communications and computing platforms; c) carriers aggressively subsidizing to increase average revenue per user (ARPU)/migrate users; and d) availability of richer content/applications.

Caris & Co. believes Apple's iPhone and Application Store set a high new bar, but BlackBerry has multiple competitive and technology advantages in super-efficient wireless data/messaging, enterprise incumbency/push e-mail, end-to-end security and unique Network on a Chip (NoC)-based service infrastructure; all of which Research in Motion is working to leverage for mass market media/content and third-party applications, including its new "BlackBerry App World" for distribution.

Gross margin has become Research in Motion's most critical near-term metric but Caris & Co. thinks it can at least stop sliding as the homerun Curve from calendar 2007 was followed by a too-packed rollout of brand new 3G models, Bold, Storm, late-calendar 2008, but Research in Motion now ramps up volume/component cost/yield curves, and high-margin recurring Services grow as a % of mix. Caris & Co. doesn't expect gross margins to recover much but doubt they now really need to for the stock to work.

Caris & Co. fiscal 2010 estimates well below consensus with EPS just flat year-over-year, but see 27% revenue growth and gross-margin stabilization enabling more than 20% EPS rebound in fiscal 2011/calendar 2010 estimates.

With Research in Motion about to report February-quarter results, already mostly preannounced, Caris & Co. model May-quarter revenue and EPS below consensus at $3.2 billion/75 cents, including 7.1 million units down quarter-over-quarter for the first time in 13 quarters but believe this is more than compensated by today's lower valuation.

For fiscal 2010, ending February 2010, Caris & Co. models revenue up 27% year-over-year to $14.0 billion and EPS just flattish at $3.38, but with gross margin stabilizing at new low-40% levels, then setting the potential for meaningful EPS rebound of more than 20% in fiscal 2011E, calendar 2010.

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