Posts filed under ‘Market’
Rim Shot
Here’s an object lesson in how stocks with thin trading volume can get hammered.
Monday, Rimage Corporation (RIMG) reduced 2nd quarter guidance, citing the economic slowdown. Revenue expectations dropped from $24-26M to a new target of $20-22M. Earnings projections plummeted, to 9 to 12 cents per share, from previous guidance of 22-27 cents. Analysts estimates were–predictably–within the previous guidance ranges.
Rimage (pronounced like the French, i.e. “rim-AHZH”) makes high-capacity disc publishing systems that replicate CDs and DVDs as well as customize discs and print/apply labels. It also does a high-margin business selling blank discs and labels.
If you’ve ever ordered a custom-mix CD from Wal Mart, it was printed on one of Rimage’s units.
While Rimage sells its publishing systems into the media industry for music, movie, and software storage, it does a substantial amount of business with large enterprises that create custom discs for product promotion or employee training purposes. It also sells to data-intensive industries needing quick, simple records storage. In particular, the medical industry is one of Rimage’s most important end markets.
I never wrote on Rimage as an analyst, but I do keep it on my radar screen, as its business model not only ties into Digital Media but also fits a theme I’d developed on creating value at the edge of markets (in this case, disc replication). However its trading volume, averaging about 77M shares daily, is less than 1% of the float.
This makes for a very illiquid stock, especially one that until Monday was at a market cap of $170M. Which is the biggest reason it’s covered by only 2 analysts.
As you might expect, Monday the stock dropped a hefty 22%. I’m convinced a good piece of that was due to a lack of buyers for an undercovered, thinly traded name. But many pundits will claim a major reason is that Rimage’s business model is dead. After all, we’re in the iPod generation, discs are passe. With high speed broadband everywhere, and ubiquitous media players, nobody needs plastic anymore.
Bzzzt! Wrong answer.
Sure, any company that reduces guidance so much, particularly one that’s so thinly traded, is going to get a serious haircut on its stock price. And I do believe that eventually, all data storage will be on drives, and delivery will be via broadband. But the key word is eventually.
Recall Amara’s Law (often erroneously attributed to forecaster Paul Saffo): “We tend to overestimate the short-term impact of technological change and underestimate its long-term impact.” As much as we think broadband has already taken over, we forget that not everyone has fiber to the home, nor have they all junked their CDs for a portable mp3 player. The iPod has not reached 100% penetration. Netflix still expects to be renting DVDs for some time. Hell, 20% of Americans have never even sent an email. Not to mention the fact that there are numerous other applications for discs besides personal entertainment media.
These transitions always take longer than we think. Expect discs of some type to be with us for at least another 10 years.
Even at less than half its recent earnings growth rate (8% vs. a 2-year CAGR of 17.4%), Rimage has a PEG ratio hovering around 1.0, based on trailing twelve month earnings. And with a solid cash flow (price-to-FCF ratio is about 7), it’s likely to be able to milk that disc market for some time to come. Perhaps not a value play, but certainly not overvalued either.
Just watch that trading volume and liquidity. Yes, an upside surprise can really rock a thinly traded name like Rimage. But risk management is the name of the game, and you don’t want to be the last one out of the exits if the bottom falls out.
Disclosure: I hold no position in any of the stocks mentioned here.
Book ‘em, Dano
Goldman Sachs analyst James Mitchell is out with a report that estimates sales of the Kindle electronic book reader from Amazon (AMZN) were between 25,000 and 50,000 in the first quarter. This is hot on the heels of another estimate of 30,000 from Citi analyst Mark Mahaney.
I certainly can’t fault Mitchell’s methodology, which backs out non-Kindle items from Amazon’s unearned revenue line to arrive at an estimate (roughly 10% of that line item) for Kindle revenue and units. Except to note that he’s made some rather broad assumptions about the other items. If so, his subtraction is suspect. Notice also that Mitchell assumes his estimates of unearned revenue for the Kindle could be higher (up to 20%), but not lower, which reveals his bias.
Citi’s Mahaney has even gone so far as to suggest 3% of Amazon’s revenue (about $750M) will come from Kindles within 2 years. Worse yet, he assumes a sales ramp roughly half of the original iPod. Frankly, he’s smoking crack.
If Eliot Spitzer hadn’t brought an end to the practice some years ago (cough, cough), I’d almost think these two were trying to drum up business for their investment banks. Instead it’s probably something much more innocent, like say pumping the stock for the traders.
Why do I think e-books are, at best, a niche item? Because end users don’t need them. Yes, it saves money for publishers and retailers. But it’s unclear whether the savings that trickle down to users overcome the hassle of another $300+ device that needs to stay charged. Plus I like paper. Apparently, so do the multitudes who continue to print things out instead of reading them on a screen. (Remember the paperless society that computers were going to bring?)
Think about it: what problem is the e-book solving for consumers?
- Gee, if only my book was portable, I could take it with me…
- Pushing a button to bookmark my place is SO much easier than bending a page corner.
- Those nasty paper cuts.
- I can take my whole library with me. (Sure, I often read 10 books at a time. And I wish I could read fast enough to finish several books on a long flight.)
- I can download a new book whenever I need one. (Yep. And how long does that take over a pokey wireless link? EVDO isn’t everywhere. And can I read the first page while the rest is downloading?)
- I want my reading material to break if I drop it.
- It’s cheaper. (True, true. Unless you want to read blogs at $2/week or newspaper feeds at $15/month. That’s a lot to pay for portability.)
Kindle isn’t going to take off in its present incarnation. Yes, there will always be technophiles and other early adopters that get one because it’s new, or somehow cool. But regardless of whether the Kindle succeeds or fizzles, the buzz-induced sales ramp will tend to look the same at this early of a stage in a product’s life.
Have you seen hordes of gadget geeks flashing a Kindle around the way they did iPods or Razrs in the early part of the adoption cycle? I sure haven’t.
But let’s assume for the moment that the analysts are right, that Kindle will ramp smartly, that reports of large orders from Chinese manufacturers are accurate, and that Amazon won’t take a bath on the units.
Let’s even go so far as to assume e-book sales are completely complementary to paper books, that Kindle entices people to read more books and doesn’t cannibalize the traditional book revenue stream. (Live dangerously, I always say.)
How does that move the needle for Amazon? Whether you think the stock is a buy or not, is 3% of revenue really going to make it a game-changer? I don’t think so. Amazon’s a visionary company, they do a lot of things right, and I wouldn’t bet completely against Jeff Bezos.
But put your money on the whole company, and don’t pay attention to the noise.
Disclosure: I hold no position in any of the stocks mentioned here.
MicroHoo: “Just Resting”
I don’t think this parrot is dead–yet.
Despite Microsoft (MSFT) walking away from the purchase of Yahoo (YHOO), there’s probably still more to play out in this drama. Ballmer will wait a bit for the share price to settle back into the low 20s, and try again, perhaps for even less than the original $31 this time. If Jerry Yang and the rest of the Yahooligans can turn the ship around, perhaps they’ll be vindicated. But don’t hold your breath.
As I commented elsewhere this morning, all of this reminds me of the property currently for sale on my street. The house is in such need of repair that it’s clearly a tear-down. As such, the market values it at the cost of the land minus demolition costs. But the owners refuse to set the price properly, figuring the house has value as a living space (natural, since they reside there.)
Similarly, Wang seems to believe Yahoo has a greater value than anyone else sees. So far he’s been unsuccessful in his attempts at home renovation. But In this case, Microsoft also has a problem: there aren’t any other suitable vacant lots available, and Ballmer can’t afford to wait too long to jump on this one, even if he has to pay more than he wants.
Frankly, both situations will be interesting to watch play out.
Disclosure: I hold no position in any of the stocks mentioned here.
Tainted Water
Quote of the Week: Paul O’Neill, former Treasury Secretary, is asked by the NY Times how the subprime problem could have escalated so far out of control. He alludes to how AAA-rated bundles of mortgage securities became untouchable when he says
If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles.
I certainly wouldn’t. Neither, apparently, did the market.
by Michael Mauboussin
