Stephen’s Posterous

Oracle-Sun Deal Promising For Datase Start-Ups by Scott Denne, WSJ.com

Although its buyout has led to plenty of uncertainty, Sun Microsystems Inc.’s database partners see more opportunity than danger in the company’s sale to Oracle Corp. Largely related to its acquisition of MySQL, a popular open-source database, Sun has partnered with several venture-backed companies to sell data warehouse products that are built on MySQL databases or run on Sun’s hardware.

"This is a monster step backward for those of us who are committed to sustaining open source," said Lev Gonick, chief information officer at Case Western Reserve University in Cleveland, who uses database software from Oracle as well as MySQL. "I have no doubt that this is an attempt to kill the competition."

An Oracle spokeswoman declined to comment beyond what company executives said during a conference call Monday. During the call, Oracle Chief Executive Larry Ellison praised Sun's Java programming technology and its Solaris operating system, which are both available in open-source versions. He did not mention MySQL.

Marten Mickos, a former MySQL CEO who recently left Sun, said he is optimistic that Oracle will use the software to drive into new markets. "It could be huge for Oracle and it could be huge for MySQL," he said.

In the past, Oracle has continued to support open-source software that it has acquired, including several products that compete with its core database business. Analysts don't believe that Oracle will stop offering MySQL or Sun's other open source products.

They anticipate that Oracle may limit spending on developing new versions of some of the programs, try to charge more for them or take other steps to wring more profit from the products than Sun did.

Open-source software often can be downloaded free of charge. Customers can elect to pay for product support and updates or continue using free versions. It is attractive to some customers -- particularly as the recession takes a toll on corporate tech budgets. Forty-six percent of businesses plan to deploy open-source software in 2009, according to a recent survey by Forrester Research.

But while open-source software has provided value for some customers, few companies have built big businesses selling the products.

Sun, which last year spent $1 billion to buy MySQL's creator, said the business generated just $81 million in billings in the December quarter. That was 55% more than the year-earlier period, however, making it one of Sun's fastest-growing segments.

MySQL is widely used by companies such as Facebook Inc. that operate hundreds or thousands of servers to run Web sites, while Oracle's databases are best known as a foundation for companies to build programs to run internal operations.

Will Crawford, an IT director at Children's Hospital in Boston, said he would be willing to pay a small fee to continue using MySQL, but if Oracle charges too much people will find alternatives. "They will use something else that is free," he said.

Another reason to exploit MySQL and other free software is that they are mainstays for young programmers -- particularly in emerging economies, said Kim Polese, who worked on Java at Sun in the 1990s and is now CEO of a Silicon Valley start-up called SpikeSource Inc.

There are "a lot of unanswered questions" about how Oracle plans to use Sun's programs, she said, but if it doesn't exploit them Oracle could "miss the opportunity to bring this new generation onto their platform."

Don Clark contributed to this article.

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.

Cisco Systems (ticker: CSCO), long a favorite among growth investors, is better known these days as a value investment. Despite worries over the global economy, there's still abundant value in the stock at a recent price of $17.

The company did most of its growing in the early 1990s selling machines, called routers and switches, that connect together personal computers in offices by directing the flow of packets of data. It got even bigger later in the decade as the Internet went mainstream.

Now Cisco would seem to be moving far afield of its networking roots with its $590 million all-stock purchase last month of consumer video camera maker Pure Digital. The company makes the wildly popular "Flip" video cameras, praised for their simplicity and small size. It's sold two million of them since 2007.

The payoff for Cisco is uncertain. But if history is any judge, buying shares of Cisco at just above a market multiple has tended to be a good time to place a bet. At a price-to-earnings multiple of 16.5 times the next four quarters' earnings, Cisco's premium to the Standard & Poor's 500 index is 1.2, well below its premium over the last two decades of 1.5 times, according to Thomson Reuters.

In fact, Cisco is cheap by a few measures. The company had $4 billion in cash on its books and $25.4 billion in investments at the end of the January quarter, and $6 billion in debt. Given that, Cisco trades at about four times the cash on its books, a steal compared to large-cap tech stalwarts such as Microsoft (MSFT), at 9.2 times, or Intel (INTC), at 8.6 times.

While Cisco's sales are expected to fall by roughly 10% in the fiscal year ending in July, there are signs business is stabilizing in its traditional networking market. In a technology rebound, a giant with unparalleled resources such as Cisco is one of the best horses to bet on.

Gone are the days of 50% sales growth at the height of the dot-com bubble, when Cisco held 90%-plus market share of Internet protocol routers and switches. In recent years, as Cisco's growth has slowed, the stock's main value for investors has been as a relative outperformer in a bear market.

What concerns Wall Street these days are two very large initiatives on Cisco's part, the Pure Digital buyout, and Cisco's announcement on March 16 that it will start selling servers this year in competition with Hewlett-Packard (HPQ) and IBM (IBM), each of which resell Cisco routers and switches.

At first blush, both initiatives offer growth at the expense of profit. Cisco's gross profit was 64% of sales last year. In contrast, servers offer a gross profit margin of 20%, and consumer gadgets like the Flip, offer even less. Then, too, Cisco stands to lose an estimated $2 billion annually in router sales through partners HP and IBM, analysts estimate.

But both deals make more sense upon further reflection. Hewlett-Packard has increasingly been selling its own router products in place of Cisco's. So the partnership was already headed for trouble. Relations with IBM are not as fragile as they may seem because Big Blue sells millions of dollars worth of chips to Cisco for routers and switches, so it has an investment in Cisco's continued success.

In both cases, Cisco is trying simply to follow where networking is headed. Where the company once sold machines that sat between computers, corporations today are trying to manage the networks evolving inside of large data-center computer installations.

Cisco can't just sell routers and switches anymore; it must provide the network that's inside all those metal racks of server computers.

As for Pure Digital, Cisco bought the company not just for the device itself, but to gain access to the design and marketing talent on staff at the company, which Cisco needs in a technology market increasingly driven by sales to consumers. "It's really all about creating fantastic consumer experiences, with easy-to-use software, and that's what Pure Digital has done," Charles Carmel, Cisco's vice president of corporate development, tells Barrons.com.

And so Cisco has chosen to bring its expertise directly to those gadgets that would otherwise be "off the grid." Meantime, there are bright spots amid the gloom for Cisco. In a note dated April 5, Goldman Sachs analyst Simona Jankowski argues that consensus earnings estimates are too low for this year and next.

Jankowski believes Cisco is taking share from, among others, Nortel Networks and HP. Cisco's sales will likely trough in the July-ending quarter, she writes.

Selling servers and digital video gadgets represents Cisco's biggest departure from business as usual in the company's 23-year history. While there's little proof either move will pay off, Cisco still has the resources to set the agenda in computer networking and the Internet.

Source.

When Lewis Horne moved to Los Angeles to attend USC, he had dreams of opening a chain of pet stores, of all things, in Southern California. But by the time he graduated, he had met his future wife, Lisa, and close friend Rick Caruso, and jettisoned his original business plan.

Mr. Horne got his professional start as a salesman at IBM, but made the jump to commercial brokerage Coldwell Banker, where he worked as an industrial broker. That company merged with Richard Ellis International in 1998, by which time Horne had transitioned to management.

Today, Horne manages the Southern California region for CB Richard Ellis Group Inc., the giant L.A. real estate services company that arose out of the merger. Mr. Horne recently sat down with the Business Journal in his downtown corner office to discuss his life, how his company is meeting the challenges of the recession, and those long bike rides.

Question: Tell us about why you dreamed of opening a chain of pet stores.

Answer: I originally came down to USC, believe it or not, to go through their entrepreneurial program. I was working as a regional manager of a pet company in Sacramento and I enjoyed it. We sold animals and supplies, and that sort of thing, and I enjoyed hiring the staff of the company and I got to work with animals, which I love. I was in high school up there and I thought, well I will start my own pet chain in Southern California.

But that didn’t happen.

I look back and laugh at that now because obviously my horizons were expanded when I met my friends at USC and moved from Sacramento to Southern California.

So how did you get into the real estate business?

I worked as an intern at IBM and after college I was looking for a job and IBM was my first stop; they had a great training program. I spent the first four years of my business career working as a sales professional for IBM in downtown Los Angeles.

What were you selling?

At the time I was selling, believe it or not, Selectric typewriters and copying equipment. And then after a year I went into selling minicomputer systems, system 34s, 36s – that kind of thing.

I got to work with manufacturing companies, distribution companies and became pretty proficient at actually working with businesses, understanding what their needs were and applying the products we had at IBM to provide solutions to their needs. It was really my foundation in marketing.

So how did you transition to real estate?

Once I was at IBM I met a friend there, Bill Chillingworth, he and I would go motorcycle riding on the weekends, who left IBM about a year and a half after I got there. He called and said, “This is a great company. It’s got the opportunity to do very well, and at the same time you are working with very motivated and successful people.”

And so I started the interview process at Coldwell Banker. Ultimately, my first job at Coldwell was as an industrial salesperson in the San Fernando Valley office in 1984. I was a salesperson until 1995.

Did you like being an industrial broker?

It was one of my favorite parts of my career because I got to work with business owners and I really learned the fundamentals of commercial real estate. We experienced a couple of market turn-downs. I did a lot of work with developers and tenants and institutional ownership, and I really developed a love for the commercial real estate industry through that process.

The business was primarily the Valencia marketplace. Newhall Land and Farming was our account. And then we represented developers and occupiers who had an interest in moving to that area.

How did you make the transition to the management side of the business?

At that time, in 1995, our company was changing. [Current CB Richard Ellis Group Chief Executive] Brett White was a manager down in Orange County and Brett recruited me, basically. He thought the skills and attributes and knowledge I had for the brokerage could be easily applied toward leadership and management and asked me to run our Glendale office. After a lot of thought I took the position, and I’ve never looked back.

In this recession, the commercial real estate market has been hit pretty hard. Is this the worst you’ve ever seen?

Certainly as a managing director, running a region, there have been greater challenges in this downturn than ones I have seen in the past, primarily just because of the speed at which this downturn has occurred.

So the big question is, of course, in your professional opinion when does it end?

We are certainly a year away. I think it is going to be six months after we hit the bottom that we will recognize that we’ve hit the bottom. We are already starting to see some signs, but I think we are at least a year away, it could be a year and a half.

Has the company had to cut any services?

We’ve had to scale back in certain areas, but we’ve not eliminated services. We are really just more efficient. We’ve got managing directors now that are overseeing two offices, for example. We try to do a lot more electronically.

Source.

Amid the worst downturn ever in the disk drive business, there are still cutting-edge data-storage technologies that can grow rapidly and profitably. These emerging technologies won't help the industry's established vendors, but could boost the fortunes of smaller specialty companies.

One potential beneficiary: STEC (ticker: STEC). After 19 roller-coaster years in the solid-state disk-drive business, the Santa Ana, Calif., company is hitting its stride. Though shares are down 41% from their 52-week high, the stock has more than doubled, to 8, since November 2008, giving STEC a market capitalization of $394 million.

STEC's disk drives are much faster than traditional spinning hard-disk drives, and use far less power. That is because they are made of flash-memory chips, similar to those in Apple 's (AAPL) iPod.

STEC has a lock on the most expensive kind of drive, which it sells to EMC (EMC) and other makers of storage equipment for large corporations. Unlike disk drives, STEC's wares cost thousands, not hundreds, of dollars. The payoff is far greater profitability than traditional disk-drive makers, which could help the shares outperform in a recovering market.

STEC trades at 1.7 times this year's projected sales, 17.4 times 2009 earnings estimates, and 11.5 times 2010 forecasts. Yet profit is expected to increase by 51.6% this year, to 47 cents a share.

While many companies, including SanDisk (SNDK) and Korean giant Samsung (005930.South Korea), sell storage containing flash chips to consumers, STEC sells only to large storage-equipment makers, and in small quantities. By wrapping complex circuitry around flash, it gets market-beating profit margins.

This year is expected to be the worst on record for disk-drive makers, with sales falling by 15% or more from 2008. Yet shipments of flash drives like those STEC sells are expected to rise 227% between 2007 and 2012, according to research firm IDC.

It is STEC's game to lose. The company is supplying nearly all the top makers of storage equipment, including EMC, Sun Microsystems (JAVA) and Japan's Hitachi Data Systems. Deals with IBM (IBM) and Hewlett-Packard (HPQ) could be announced soon. As a result, STEC's main product, the ZeusIOPS, saw sales climb 300% last year, to $53 million.

Analysts think STEC's disk-drive performance has about an 18-month lead on competitors. "I look at the design wins in the marketplace, and right now, this market is all theirs," says B. Riley analyst Mike Crawford.

Intel and Hitachi could be next in line, but "it is going to take them till early next year to come out with a competitive product," and longer to get it accepted by storage-equipment vendors, adds Needham analyst Richard Kugele.

STEC's 50-year-old co-founder and chief executive, Manouch Moshayedi, came to the U.S. from Iran in 1979. He says the company's biggest advantage is its 30 flash-memory-drive patents, and 53 pending patents. Seagate filed a patent-infringement suit against STEC last April, but dropped all charges last month.

Little companies with hot technology will always have competition from big companies with more resources. But with its patents and customer deals, STEC is far more likely to be bought out than pushed out of this market.

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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Cisco Systems Inc. fired the first shot in the war for the data center on Monday, March 16, 2008, when the company announced it would begin selling servers later this year. Now International Business Machines Corp. may be firing back with news leaking out last night that the company is in talks to buy Sun Microsystems Inc. for $6.5 billion.

A number of venture capital-backed start-ups have cropped up over the last few years touting ways to make servers more powerful, more efficient and easier to manage, and these start-ups could be caught in a strong updraft as companies like Cisco, IBM and Hewlett-Packard Co. look to one up each other.

One such company is 3Leaf Systems Inc., which makes software that enables data centers to connect machines with far fewer cables. 3Leaf’s technology, called I/O virtualization has not been ignored by other start-ups. Xsigo Systems Inc. has developed an appliance with similar technology and Austin, Texas-based NextIO Inc. makes a chip that could add the same capability to almost any server.

Decreasing the amount of cables in a data center can significantly cut back on the amount of time and money an organization spends on managing its servers. Servers today can have as many as 30 networking and storage connections. I/O virtualization products can reduce that number to as few as two or three.

Much of the attention of the big boys will be focused on server virtualization, the technology that has greatly improved data center efficiency by allowing more than one operating system to run on a single server. Few start-ups are left that compete in that space; one of them is Virtual Iron Software Inc., which sells a low-cost version of the software popularized by VMware Inc.

Blurring the line between hardware and software has created a whole new host of problems in the data center and numerous start-ups have sprung up to help manage those. Cisco has partnered with BMC Software Inc. and HP and IBM each have their own in house offering, but many investors and analysts doubt that these traditional products are up to the task of managing new data centers, where virtual servers jump from one physical machine to the next.

One such company is Fortisphere Inc., which makes software that helps IT administrators put in place policy and controls to govern the behavior of virtual servers and track their physical location. But tracking and compliance are just some of the problems created by virtual machines.

Another start-up, V-Kernel Corp., is selling software that warns administrators when a server is getting overused and also ties the usage of the free-flowing computer resources to specific divisions and groups within a company for budgeting purposes.

Several others have recently raised venture capital to compete in this market, including Embotic Corp., Evident Software Inc. and Hyper9 Inc., which have raised a combined $15 million in the last few months.

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A monopoly is a license to print money, but one day the printing may stop.

That reversal hasn't yet come to Microsoft, whose 90%-plus share of the personal computer software market has made it a cash machine. The stock, though, is acting as if the day of reckoning isn't far off. In the past 12 months, Microsoft stock is down 42%, comfortably underperforming the 25% or so declines at other blue chip tech names such as Apple, IBM and Oracle.

Microsoft shares are trading around 9.6 times consensus fiscal 2009 earnings, a little below IBM, at about 10, and well under the others.

That may create an opportunity for investors near term. Microsoft still generates plentiful free cash flow, 5 billion this year, estimates Credit Suisse, andd sits on net cash of nearly $19 billion. So even though earnings are expected to dip this year, the dividend, which offers a 3% yield, is super safe. That can't be said for many other companies.

What's more, the stock may get a boost ahead of the release over the next nine months of Microsoft's latest operating system, Windows 7. The reality that Microsoft's operating system monopoly is gradually slipping away will, of course, continue to weigh on the stock, but it's easy to overstate the immediacy of the competitive threats facing the company.

Microsoft has lost market share, including to Apple, but only by a percentage point or so. Google's free applications software may one day be a viable alternative to Microsoft Office, but it isn't yet. Smartphones will eventually erode demand for laptops, hurting Microsoft, whose Windows Mobile has only 12.4% market share, according to Gartner. Again, this could take years to play out.

A more serious threat may be the expected shift among businesses to use shared computer services run in a cloud, paying for the service rather than for PC software. Microsoft wants to be a major player in cloud computing. It has the deep pockets necessary to invest in the data centers required, as do rivals including Google and IBM. But IDC projects cloud will account for only 9% of business software and infrastructure spending by 2012.

The experience of other industries undergoing structural shifts, such as broadcast TV's loss of market share to cable networks, is that the secular changes take a long time to seriously undermine a business model.

Admittedly, to protect its market share in the meantime, Microsoft likely will have to cut prices, hurting operating margins that now reach 70% in some products. Already, it gets only half its usual price for Windows on low-cost laptops called netbooks. That will hurt profitability.

Microsoft has plenty of ways to cut costs, however, including cutting investment in some areas. Microsoft's online business lost about $1 billion in the first half of fiscal 2009, despite massive investment in recent years to build a presence in the search market dominated by Google.

This isn't to say Microsoft should hunker down and be run for cash. Microsoft has successfully built a server business in recent years. But new business successes have to be huge to make a meaningful contribution to a company generating $20 billion-plus of annual operating profit.

It needs to pick its investment spots carefully for its $9.5 billion in annual research and development spending and be willing to change tack when businesses, such as search, fail to gain traction.

This sort of retreat isn't likely to happen under the current management, which is likely to keep swinging for the fences. A more disciplined approach to costs and investment likely won't happen without some outside pressure. But with Bill Gates' stake gradually declining, it's now down to 8.5%, that day will come eventually.

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Some of the world's best software companies have seen their stocks fall off a cliff, as their customers have become far less inclined to buy programs that streamline the day-to-day tasks of business.

The collapse in the valuation of small software makers won't last long. For one thing, these companies are acquisition targets in good times, and, more so in bad times, when their depressed stock prices make them tempting targets.

Even without a buyout, these companies seem compelling. After all, even in a slump, their customers still need database, supply-chain, and sales-management software to keep operations running. Four stocks in particular have seen stock-price declines ranging from 19% to 45% in the last 12 months. They are Informatica (INFA), Manhattan Associates (MANH), Quest Software (QSFT) and JDA Software Group (JDAS).

All four stocks are substantially off their 52-week highs, by as much as 54% in the case of JDA Software. All four companies could be takeout targets for a large software vendor looking to consolidate the corporate software market, such as Oracle (ORCL).

Not only are these companies not garnering the buyout premium that once inflated their valuations, they now trade at forward price-to-earnings multiples well below their five-year median, and, in a couple of cases, below the depressed valuation of the Standard & Poor's 500 index.

"Informatica, Quest, JDA Software, and Manhattan Associates all have sizable installed bases, which generate a lot of maintenance revenue and help to put a floor under earnings," says technology analyst Tony Ursillo, with Loomis Sayles in Boston.

"In addition, they're all attractive acquisition candidates for many of the larger software and hardware companies, including Oracle, Hewlett-Packard (HPQ), IBM (IBM), and EMC (EMC), all of whom have cash-rich balance sheets to work with."

Maintenance revenue refers to payments customers make to keep using the software they've bought. That can be an important lifeline for software makers when new sales are scarce. Even without a buyout, these firms have worth in that their wares go to the heart of how companies maintain and refine their operations.

Manhattan Associates, a $346.2 million market-cap company based, oddly enough, in Atlanta, makes a program called Scope that helps companies plan the "supply chain," including tools for forecasting the number of widgets that should be built, or automating the process of sending purchase orders to suppliers.

Similarly, $294.4 million market cap JDA Software, based in Scottsdale, Ariz., makes a program called Master Planning that helps companies decide when and in what volume to manufacture a given product, and how to move basic materials and finished products from one facility to another.

Informatica, a $1.04 billion market-cap company, which is just up the road from Oracle in the Silicon Valley town of Redwood City, Calif., makes programs that clean up the information stored in a database and allow companies to move that data between different programs more efficiently.

Similarly, $1.04 billion market cap Quest Software of Aliso Viejo, Calif., offers programs with the amusing name TOAD. TOAD helps programmers responsible for managing an Oracle database to build new functions into the database and to make sure that it's running smoothly.

Although earnings estimates have come down for all four companies, they haven't collapsed dramatically in the past 12 months. At this time last year, for example, Wall Street forecast that Informatica would generate 89 cents per share in net profit for calendar year 2009. That number has come down to 80 cents.

JDA's earnings-per-share forecast for 2009 has fallen from $1.68 to $1.45, which would represent a 2% profit decline from 2008, in place of what would have been 14% growth. Quest's estimate on the Street has actually risen, from expectations a year ago of $1.04 to current projections for $1.09 in EPS this year, for a roughly 9% growth from last year.

A year ago, Manhattan was forecast to deliver $1.73 per share for this year, for 17% year-over-year EPS growth. That's now looking more like $1.23, which will be a decline of 11%. Despite diminished expectations, the fact that all four companies are profitable, and that they trade at around twice the cash on their books, with little or no debt, makes it rather remarkable that their slumping outlooks should have pushed their P/E multiples to drastic lows.

Informatica, for example, the most expensive of the group, trades at a forward price-to-earnings multiple of 14.8, far below the 24.2 median P/E multiple it has garnered in the last five years. Manhattan Associates' 11.8 P/E is a little more than half of its five-year median multiple. And JDA and Quest are actually trading at discounts to the S&P 500, at forward multiples of 6.5 and 10.1, respectively.

The software these companies make didn't suddenly become unusable. Rather, tough times have made buyers tighten their belts. When some balance returns to the economy, their products will be in heavy demand again. At the current valuation levels, a buyout could reward investors even before that happens.

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Must we look back to the Great Depression to really understand the current stock market?

A year or so ago, when a select few investment newsletter editors began arguing that we need to do so, the overwhelming majority of advisers believed that drawing such an analogy served little purpose other than fear mongering. It is testament to the severity of this bear market that the consensus opinion has shifted so much that it is now respectable to look to the 1930s for guidance about what is in store for equities.

I'm skeptical, however. That's not because I don't think that decade has much to teach us.

My skepticism instead traces to the small number of analysts and commentators who have really analyzed what an analogy to the 1930s truly entails. And if we are to genuinely learn the lessons of history, we have no choice but to start with an accurate assessment of what actually happened.

After examining several aspects of the stock market's behavior during the 1930s, it would appear as though a replay of that decade might very well be less scary than assumed by many of those who superficially draw the analogy.

Here are some myths about the Depression that should be dispelled.

Myth 1: It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929.

It's easy to see why investors believe this myth to be true: It wasn't until Nov. 23, 1954, that the Dow Jones Industrial Average closed above the level at which it closed on Sept. 3, 1929, the date of its closing high before that year's crash. That's a recovery period of more than 25 years.

If the recovery from the bear market over the last year and a half were to take the same length of time, the Dow wouldn't again close above its all-time high from Oct. 9, 2007, of 14,164.53 until, you'd better sit down, Dec. 28, 2032.

The truth, however, is that it took stocks far less than 25 years to recover. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was just as high in late 1936 and early 1937 as it was at its precrash peak in 1929. That was less than eight years later.

That may not be great news to investors who are hoping to recover their bear market losses in just one or two years. But it's a whole lot better than taking 25 years to recover those losses.

Why the Big Difference?

One factor is dividends, which were substantial during the 1930s. At the depths of the Great Depression, in fact, the Dow's dividend yield was in the double digits. Ignoring dividends, which is what investors do when focusing on price alone, therefore, introduces a significant pessimistic bias into any historical analysis.

Another Factor is Deflation

The consumer price index actually dropped by 27% between its 1929 peak and its low in 1933. A stock that dropped by less than this amount in nominal terms over this four-year period, therefore, actually turned a profit in inflation-adjusted terms.

Yet another reason why it took the Dow so long to surmount its 1929 peak: The decision in 1939 to delete International Business Machines from the average. It wasn't added back until years later. According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed from the average in 1939.

Myth 2: If we're playing out a 1930s script, now would be a bad time for long-term investors to get into the stock market.

Actually, if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years.

Once again, this insight relies on data from Professor Siegel. To locate the date during the 1930s that is most analogous to today, he looked for the point at which the stock market after 1929 had, as is the case today, declined by around half on a dividend-adjusted and an inflation-adjusted basis. That point came at the end of 1930, just 16 months after the August 1929 stock-market top. Ironically, the current bear market is just 16 months old too.

According to Siegel, over the five-year period beginning in January 1931, the stock market produced an inflation-adjusted total return of 7%. That's right in line with stocks' long-term average performance, in fact.

To be sure, this myth does have a big grain of truth to it. Over the first five months of 1931, the first five months of this five-year period -- the stock market fell 60%. You read that right: That's a 60% drop on top of a 50% drop over the previous 16 months.

If the stock market today were to suffer a further decline of similar magnitude, the Dow Jones Industrial Average would be trading below the 3,000 level by the end of July.

So, to that extent, it is true to say that, on the assumption we're playing out a 1930s-like script, now would not be a good time to enter the stock market. But this truth pertains more to shorter-term investors than to longer-term investors. According to Siegel, in fact, an investor who entered into the stock market in early 1931 was made whole again by June 1933, despite digging a 60% whole in the first five months.

Myth 3: The stock market's recent extraordinary volatility provides a clue to the wild ride that lies ahead if we're playing out a 1930s-like script.

Actually, undeniably large as it has been, recent volatility doesn't even begin to compare to what it was like during the 1930s. In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%. The month with the biggest Dow move was April 1933, when the Dow rose by 40.2%. In August 1932, furthermore, the Dow rose by 34.8%.

The biggest monthly losses during that decade were almost as big. The largest came in September 1931, when the Dow lost 30.7%. These monthly changes dwarf what has been seen in the current bear market. The biggest calendar month loss so far came last October, when the Dow fell by 14.1%. The month-to-date loss for February is minus-17.2%.

To measure the magnitude of the stock market's volatility during the 1930s, I calculated the standard deviation of the Dow's monthly returns on a trailing 36-month (or three-year) basis. In mid-1933, this statistic rose to 15.4%, an extremely high number. During the current bear market, in contrast, this comparable statistic has never risen above 4.1%.

The bottom line? If we are indeed playing out a 1930s-like script, we have an incredibly wild ride ahead of us. But for those who have the intestinal fortitude to hang on, such a story would have a surprisingly happy ending.

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