Taser has my attention again

My not-so-diversified portfolio has received a bit of a beating lately.  Last week I closed my positions in Intel and sold off part of my Marchex position (after a nice 34% run up in 6 weeks) so I’m sitting on a bit of cash.

I hadn’t intended on buying anything right away.  Having just shy of 25% of my portfolio in cash seems like a prudent idea right now, but my position in Taser has grabbed my attention lately and I’m thinking about adding to it. 

As I’ve discussed before, Taser makes (usually) non-lethal stun guns for use by law enforcement, the military and, increasingly, the general public. 

A recent announcement by the company has caught my interest and has me seriously considering adding to my current position.  I’ve been trading Taser on and off for the last few years and their stock certainly fluctuates.  Right now, its around $10.30/share.  I’d be comfortable buying it here, I can’t see it dropping much below $10 or so and I’d expect it to get to $12ish without any problem over the next few months.

The recent TASR announcement that has me interested is: Sports Authority will begin selling Taser’s in 138 of their stores.

This is potentially a big deal.  The Sports Authority will be their largest consumer retailer.  The company’s bread and butter is 100, 200, 300 orders by law enforcement and military organizations around the world.  They are penetrating the local police forces, the forces are starting with a hundred or so units to evaluate with the hopes that they’ll buy more as officers become used to using them and learn their benefits.   The Taser C2 (consumer version of the Taser) only debuted in July of 2007 and contributed just under $4 million in revenue for all of last year.  At $300-$350 retail per unit, that isn’t a ton of units.  With a large retailer such as The Sports Authority signing on, I could see consumer sales increasing dramatically and also the potential for other large consumer chains to jump in as well to remain competitive.  This deal is nothing but good news for Taser.

AMD stock – long term trouble or two year double?

There was a time when I chewed through personal finance and stock investment books at a breakneck pace.  I read all the guru’s books, I read all the motivator’s books, I even read a book by Robert Lichello titled “How to Make $1,000,000 in the Stock Market Automatically”. 

Each book had its own little trick to mastering the stock market.  They are all much easier said than done of course.   One of the constants though is the concept of looking for stock cycles.  I’ve spent the last 10 years ranging from mildly interested to obsessed with following the stock market and looking at stock charts.  Stocks to tend to move in cycles, but its often difficult to know when the trend will turn and whether or not the current cycle will buck the trend or not.

I’m having the same conundrum with Advanced Micro Devices stock right now (AMD).  Its off considerably as of late with a host of profitability issues, cash flow burn, lagging product line, integration with its relatively acquisition of ATI (in mid-2006), etc.  AMD has always been the underdog in the war with Intel, but the question is whether or not it has the strength to come back now.  As of today, its trading at $6.11 a share.  If they can’t turn themselves around, they may very well go out of business, get aquired at a rock bottom price (though I’m not sure by whom) or spin off one of their business units and hope that their parts are worth more individually then they are as a whole. 

The potential is huge though if AMD can turn around.  They’ve done it several times in the past and, at this point, it seems most everyone thinks they cannot pull it off.   Looking at their chart, they went public around 1983/1984 at a split adjusted ~$10/share.  By 1991 they were trading at somewhere around ~$3/share.  Between 1995-2000 they traded between $6-$22/share.  2000-2005 saw a range between $4-$50/share.  Since 2005, they’ve traded between the low 40’s and their new low of $6 a share.  It seems the normal range for them is somewhere in the $10-$20 range. 

A turnaround certainly won’t be immediate but, if they can manage to turn things around, it seems this could be a reliable double or even triple over the next 2-3 years. 

I’ve been burned by AMD stock so many times in the past that I’m very negative on them, but the recent halving of their stock makes the bargain-hunter in me perk up as a risky, but potentially very rewarding play for the next few years.

Yahoo SmartAds – Start of the next wave of ad targeting

Well, it was bound to happen, this week Yahoo! announced their SmartAds platform to allow advertisers to better target potential customers as well as more flexibly create ads for specific  markets.  The flexibility in ad creation is a neat feature for advertisers and seems fairly unique, but the improved targeting is the piece that is really going to have the greatest impact both on advertising dollars for Yahoo! and the continued debate over online privacy concerns.

More than a technical feat, the improved targeting features seem to mainly be a shift in privacy policies for Yahoo!.  The example given in Yahoo’s press release is: “if a user is browsing for hybrid cars in Yahoo! Autos and has selected San Francisco as their default location in Yahoo! Weather, Yahoo!’s SmartAds platform can assemble and deliver a display ad in real time that showcases a hybrid vehicle from a major auto brand, as well as local dealer information and current lease rates”. 

I knew this was coming but, honestly, I thought Google would do it first.  The privacy implications of this new platform are significant, but not unexpected. Those little privacy policies that we all blindly accept when we sign up for Yahoo!, Google, and Microsoft services basically give those companies access to use the information you give them in nearly any way possible.  Google’s Gmail has been known to target ads based on the content on your emails (though they claim to not store that information for later use) and geotargeting based on your IP address has been around for a while, but these companies are finally starting to fully leverage their huge databases of information about your online habits to maximize advertising dollars, and Yahoo! appears to be leading the way with their new SmartAds platform.

Its not illegal, you gave them permission to use the information when you created the account, but this could be the beginning of a new wave of advertising.  The Microsoft, Yahoo and Google databases have huge amounts of information about you, but they’ve been resistant to merge it all together mainly, I suspect, for the bad press it could generate regarding privacy concerns.  Now, the floodgates are starting to open.  The actual experience for the user may not be too bad, targeting ads aren’t necessarily a bad thing, but they are creepy.

Maybe you buy a plane ticket from LA to Hawaii through Yahoo! Travel to leave on July 6th and return on July 20th.  Yahoo knows your home city is normally Los Angeles (your home zip is an LA zip code) so they target L.A. based ads to you most of the time, but now they know you’re going to be on a trip to Hawaii for two weeks.  Maybe they’ll target you with Hawaii tour package ads leading up to your trip then, if you log into your account while your in Hawaii, they’ll target you with Hawaii restaurant ads and more local advertising.  If you visit Yahoo! Health a lot, be prepared to get targeted with fitness and nutritional ads in your Yahoo search results.  If you track your stock portfolio in Yahoo Finance, be prepared to see ads related to investing in the rest of your Yahoo experience and maybe even targeted ads based on the companies you invest in.  Wouldn’t Microsoft like to know, when they advertise to you, that you’re an investor in their company vs. just an average joe?  Wouldn’t it be interesting if Yahoo could use the value of your Yahoo! portfolio to know, not only in general terms what your income is (based on the demographic data you gave when you signed up), exactly how much money you have in your 401k and stock accounts?  If they served that data up to advertisers, they would be a huge increase in ad revenue.  If you have a very large 401k plan balance, maybe they’d target you with financial advisor advertisements.  If you have stock options in your portfolio, maybe they’d target you with options-trading workshop advertisements. 

Yahoo has taken a step toward the future with SmartAds.  Google and Microsoft will soon follow soon.  These companies are building up huge databases about your online activities and they are going to start heavily leveraging them going forward.  I’m surprised its taken this long, but get ready for a big change in your online experience as these community/portal sites start to turn up the heat on peddling their advertiser’s products to you.

Analysis of home mortgage refinancing options

Recently, the time came for me to refinance my house to lock in a longer term interest rate.  I bought my house on a three year interest only adjustable rate mortgage (ARM) and my interest lock was ending so it was time to find another mortgage.  I had entered into the property with 100% financing consisting of an 80% Interest only ARM as the first mortgage and a 20% adjustable HELOC for the 2nd mortgage.  My goal in refinancing was to extend my interest rate lock for at least 5 more years and to consolidate my two mortgages into one, hopefully at a lower rate due to my 75% loan to value ratio.

From the vast pool of mortgage options, I widdled my options down to three that seemed like potential candidates:

1) 5 7/8% 30 year fixed mortgage with amortized payments over 30 years
2) 6 1/8% 30 year fixed mortgage with interest-only option for first 10 years
3) 6 3/8% 5 year ARM with interest-only option and the ability to pull out cash up to 100% of the property value

As an example because it allows fairly round numbers, lets assume the underlying mortgages on the house are $225,000 and the market value for the home is $300,000.  That equates to a 75% LTV (Loan to value) ratio, close enough to my actual numbers.

  • The 30 year fixed amortized option would require payments of 1330.96/month. (calculator available here)
  • The 30 year fixed, interest only option would require payments of 1148.43/month ((225000 * .06125) /12)
  • The 5 year ARM with interest only option would depend on how much money I actually wanted to pull out of the house but, to keep things consistent, would equate to payments of 1195.31/month ((225000 * .06375) /12)

So, the questions I had to ask myself are:

  • How much in extra interest am I paying between the two 30 fixed options? 
  • Is the extra interest cost per month less than the opportunity cost I’d have with the extra $182.53 a month that I’d have to pay for the amortized option?

The interest only option is costing me an extra 1/4% in interest which, on $225,000 equates to about $47/month.  Is it worth $47 to free up $182.53 per month?  It depends on your cash flow of course. If the $182/month would make a significant difference in your economic life, then perhaps taking the interest only option would be a better choice.  For me though, I could afford the extra $182 each month in an effort to save $47 in pure interest.  The obvious additional benefit is that I’ll be paying down the principal over 30 years with the amortized loan whereas I would not be paying toward the principal at all for the first 10 years on the interest only, then my payments would increase dramatically after 10 years as the remaining 20 years would force me to pay interest and amortize the principal over only the next 20 years instead of 30.

The second question is whether or not the 5 year ARM with a cash out option would be worth it.  Well, the interest rate between the 30 year I/O loan and the 5 year I/O loan with cash out option is 1/4 different as well (6 1/8% and 6 3/8%) so I know, once again, I’d be paying an additional $47/month in interest just on the $225,000.  The benefit of the 5 year cash out loan is that I could pull an additional $75,000 out at the 6 3/8% rate.  The question is, what kind of return would I have to make to justify that extra amount?  The additional $75,000 would cost me about $398/month in additional interest payments.  Is there a reasonably safe investment option that could bring in more than that amount?

There are a few different ideas I had:

  1. Invest the money in a mutual fund. 
  2. Try to lend the money at a higher rate, probably via a private loan against property
  3. Use the additional money to purchase investment property
  • Option 1 just comes down to a question of risk.  Is it worth it to you to risk a $400/month payment on whether or not the market rate will outperform your loan’s interest rate?  If you assume you could earn, say, 10% on the money in the market, that would, theoretically come to $625/month in income which would be a fairly good margin on your money.  Even if you think the market will outperform your cost of capital though, you still have to worry about liquidity and cash flow.  Do you have enough cash flow to make the $400/month payment out of your other income and leave the $75000 to grow on its own or are you going to constantly have to sell bits of your stock each month to make the $400 payment?  If you don’t have the cash flow available to let the money grow, you are increasing your dependence on market timing (you would be forced to sell bits of your stock each month/quarter when the price may be a low levels) and will be spending a fair amount in commissions, depending how you handle the transactions.
  • Option 2 comes down to risk and liquidity as well.  Are you comfortable loaning money to a stranger, even if it is collateralized against real estate? Do you want to be in the position of having to worry about whether the person you lent the money to will make monthly payments to you and not commit acts that may decrease the value of the property against which you’ve collateralized your loan?  If that kind of question worries you, lending to a private source may not make sense.  Keep in mind you’d probably need to get a return of at least a couple points higher to make it worthwhile, and you may be lending to folks with substandard credit.  Depending on the person you are lending to, the risk may not justify the reward.
  • Option 3, investing the money in additional real estate comes down to a question of what kind of time and interest you have in becoming a real estate investor.  In my market, buying a single family residence that will have a positive cash flow as a rental is difficult.  In order to find a property that cash flows, you’d likely have to invest in a multi-family properly such as a duplex, triplex, or small apartment building.  Having $75,000 in cash may be enough to get you into a duplex, but then a portion of your life becomes being a landlord, maintaining the property, and dealing with the financial and risk aspects of being a real estate investor.

The last thing to consider is that if you were to pass on the cash out ARM option and go with the 30 year fixed amortized option, you will be saving 1/2% in interest on your $225,000.  That equates to $80/month in interest that you are saving.  If you were willing to pay $400/month in interest on the $75,000 in cash with the ARM option, you could view it as allowing you to pay up the $480/month for that $75,000 if you could borrow it outside of your 1st mortgage.  $480/month on $75000 equates to just over 7 5/8% interest rate.  Although it is difficult in the current market, you may be able to find a Home Equity Loan or Home Equity Line of Credit (HELOC) at that rate in the future when you have a use for the money. That would save you paying interest on the money now when you may not have an immediate use for it.

In the end, I went with the 30 year amortized option.  It made the most sense for me from a interest-savings and cash flow standpoint.  In the future, I may take out a Home Equity Loan or HELOC to pull additional equity out, but I will have a 30 year fixed 1st mortgage on my house which will allow me to sleep well at night knowing my payments will be fixed for the remainder of the loan, I’ll be making small payments against the principal, and I’ll be able to retain a fair amount of equity in my home which will protect me against market downturns and allow me a vehicle for additional borrowing if I find a just investment in the future.

Declining operating margins at Google? No cause for alarm

I starting thinking about Google’s sources of revenue tonight, specifically their AdSense program, and decided to do a little research. What got me interested was understanding how their AdSense program, which pays content providers when a user clicks on a Google-provided text ad on their site, relates to their bottom line.

Logically, the Google’s AdSense for Content program seems like a money machine for Google. The idea is fairly simple, advertisers go to Google and bid on a keyword or term using their AdWords platform. The advertiser can choose whether to advertise only on Google sites or whether to advertise on Google sites and within the Google Network. The Google Network consists of thousands, probably millions, of content providers like myself that create web pages, write blogs, post videos, sell products, etc online. If you, as an advertiser, agree to advertise within the Google Network, its likely your ad will show up on a non-Google site. The beauty of AdWords is that you generally only pay per click (you only pay if someone actually clicks on your ad and goes to your site), and your ad will generally only show up on pages with relevant content. If you sell horse shoes for a living and advertise on AdWords for your horse shoe business, its likely your ad will only come up on partner sites where the bulk of the partner content is related to equestrian subjects. If someone clicks the ad, you pay Google a predetermined amount (AdWords is an auction system that allows you to bid on certain search terms that apply to your business), Google passes the bulk of that amount on to the content provider (the person to created the horse shoe related web site), and they keep a small amount for themselves. So, big deal you may say, Google is sharing, they say the bulk of, their ad revenue for that click with the content provider… that doesn’t sound too profitable.

However, you have to think harder about the situation. Google, according to their latest 10-Q quarterly statement, earned 99% of their revenue through advertising. About 60% of Google’s ad revenue came from Google web sites, the other 40%?…The Google Network. Thats right, 40% of all the money they brought in last quarter was brought in through collecting a small portion of the advertising fee that the advertiser paid when someone clicked a Google AdWord ad on a non-Google site. This is pretty huge. This basically says Google’s leading position in the search industry could disappear, effectively www.google.com could disappear, and the company would still bring in 40% of what they are making today by having other people display ads on their own sites. Millions of people are adding content to the web daily and Google is placing content-relevant ads on those sites through AdSense, bringing incredible value to their advertisers, a source of revenue to the web site creators, and still having enough left over to line their pockets.

The reason I bring all this up, and the reason for the title of the article “Declining operating margins at Google? No cause for alarm” is because of the way they recognize this extremely significant source of revenue. According to their quarterly statement, all revenue brought in by selling ads on Google Network sites is considered revenue. If you pay a nickel to Google for someone to click on your horse shoe shop ad, Google will record that nickel as standard revenue on their income statement. The four cents (or whatever the rate is, it isn’t too important) that they pay the content creator who wrote the page about horses is counted as Traffic Aquisition Costs and rolled up under cost of revenues. This makes sense, but it heavily impacts operating margins. Operating margins basically say what percentage of each dollar of revenue was profit. Using the example I talked about before, Google may charge the horse shoe company $0.05 every time someone clicks their horse shoe shop ad on a Google Network site, Google may give $0.04 of that to the person who runs the website that brought in the click. Google will keep perhaps $0.01. How does this accounting method affect the operating margin? Well, Google says the $0.05 that it got from the advertiser is revenue and the $0.04 is a Traffic Aquisition Cost (an expense, a cost of revenue) meaning the operating margin in this case is 20%. Of the $0.05 they brought in in revenue, only 1/5 made it down to the bottom line as profit.

The operating margin for ads on the Google-owned websites is much higher as they don’t have to pay the $0.04 to the content provider, as they are the content provider. Nearly all of that nickel is pure profit for them.

Either way, if operating margins decrease at Google over the coming quarters due to this reason, I wouldn’t be disappointed. Normally, decreasing operating margins at a company are a bad sign as it means it is costing them more money (usually in the form of higher costs or more personnel) to bring in the same amount of money. This isn’t quite the case at Google. If operating margins decrease, it doesn’t mean it is costing them more money in true form, it just means a larger mix of their revenue is coming from the advertising services on the Google Network where a large percentage of the revenue is given to the content provider. It doesn’t mean revenue has dropped (that would be a bad sign), it just means that they are likely selling more ads on Google Network sites as a mix of their product. Given that there are millions of people who are doing all the work for Google in regards to providing rich, content relevant information on their own sites. As a shareholder of Google I’d be perfectly content if Google continued to increase their ad revenue from Google Network sites at the cost of having lower operating margins as long is it is due to this reason.

Getting someone else to do all the work while you take a portion of the profits? Sounds like a pretty sound strategy to me!

Omniture – Analyze this!

I’ve used Omniture’s products in the past for analyzing web traffic, they have a great product and offer exceptional value to their customer. Their revenue model is strong in that they make a small amount of money for each server call that is made from the customer to their servers. One or more of these server calls happen with each page hit to register information such as the page name and page section information so traffic can be rolled up by page category.

Omniture’s web analytics software allows customers to see traffic trends, paths that visitors take through the site, information about their visitors such as geographic area, browser type, resolution, etc, and allows the customer to track how often certain users return to their site to get an idea of customer loyalty. The product is amazing.

The industry itself is competitive. Websidestory (public company: WSSI) has been a long time player in the field with their HitBox product, Google recently announced a free web analytics package that anyone can use to analyze their website’s traffic levels, and there are a number of other privately held companies which offer similar services.

While I see Google’s free service as offering perhaps a little low-end competition to Omniture, corporate customers need a robust solution, guaranteed uptime, reliable tech support, and consistent development of new features. Corporate customers will likely bypass Google’s package and go with a pay service so they can have a reliable, enterprise level app.

Since its Initial Public Offering in late June of 06, the stock has gone from 6.25 to its current level of 15.36 (1/12/07). The company is not yet profitable, but they have $65 million in cash and Yahoo! Finance shows Operating Cash Flow for the last 12 months at $-843,000. They are losing money, but it looks like they have a pretty good war chest to sustain them through their growth.

This company has been getting more and more press lately, I suspect due mostly to the fact that it has had such strong performance since its IPO and the fact that web analytics is a hot industry that will explode over the next few years as web companies realize that operating a web site without analytics software is like running a brick and mortar store with the lights off. Without web analytics software, you have no way to see your customers, where they go, what they are interested in, what they are not interested in, etc.

It seems there is a lot of hype getting built into Omniture’s stock price at these levels. With a market cap of 741 million dollars, I suspect they will start drawing a lot more attention over the coming year.

RadioShack – Investors love Julian Day

I bought some January puts on RadioShack for 1.18/contract on December 12th. The stock was trading around $17 and Best Buy had just announced that earnings were pressured due to low margins caused by price competition. I’m not the hugest fan of Best Buy, but their price and selection is pretty great. If they are seeing margin problems, I started to think about what other players would be affected. Circuity City seemed like a likely candidate, but, after having shopped in both stores, I could see the benefits of each. Checking out the “Competitors” section on Yahoo! Finance, I spotted RadioShack.

I’ve been an occasional customer of RadioShack all my life, but it certainly holds no special place in my heart. I see their greatest strength as having a large number of stores in small neighborhoods and small towns. Seems that most places I’ve lived, there has always been a RadioShack within a few miles. Ten or fifteen years ago, RadioShack was still in a pretty good position. Big box stores were still seldom found in towns smaller than ~50,000 people, the level of knowlege of the average Joe in regards to electronics was still fairly low, and RadioShack could offer a decent selection of products across the board.

In the last ten years, things have changed. At least out here in the Pacific Northwest, one is hard-pressed to find a place that is more than an hour from a big box electronics store like Best Buy, Circuit City, Comp USA, etc. Home electronic “necessities” like stereo’s, cordless phones, digital cameras, DVD players, etc are easily available from general discounters like Target, WalMart, Fred Meyer, KMart, etc.

What has RadioShack done to adapt? From my impression, very little. I still go to RadioShack every once in a while, usually for odd electrical components (that are becoming harder and harder to find may I add), and I’ve seen what the stores have to offer. Cell phones? You bet. Mid-level stereo components? Sure. A decent selection of basic TVs and telephones? Indeed. Anything special, catchy, hip, out of the ordinary? Nope.

Consumers are getting much more savvy when it comes to purchasing electronics. People are very willing to shop around. Smaller items can easily be bought online. Larger or more expensive items usually require some research and price comparison which can be done online and usually results in the lowest price being found at one of the big box stores. I really don’t see how RadioShack can survive. Increase margins all you want by cutting costs, but costs can only be cut so low. Prices can be kept slightly above the competition due to convenience, but they still have to be in the same ballpark. RadioShack stores have no ability to offer a significant selection of products as they are too small.

Julian Day is running the company now after the ouster/resignation of its prior CEO. Julian Day is an excellent executive known, most recently, for his turnaround of Kmart. Investors seem to love Julian Day. The stock surged the day the announcement was made that he was taking the helm. Despite his reduction of transparency by ending quarterly conference calls, the stock price remains strong. Cash balances are increasing, margins are improving, but store sales numbers are dropping rapidly. I don’t think its sustainable. Turning around a chain such as Kmart seems like a very different beast to me. Kmart can be cost competitive due to its size, Kmart can offer tons of selection due to the square footage of its stores, Kmart can learn from its competitors and maximize the efficiency of its supply chain which will cause profits to skyrocket due to the sheer quantity of product that they ship. In my opinion, Kmart was a broken company. Fix the company and Kmart can shine again.

RadioShack is a broken business model, and that is much harder to fix. I bought puts in this stock and lost money, but I don’t think I made an error in judgement, I just bought puts with an expiration date too near in the future. The stock is going to bounce around over the coming year or so, but this company seems destined for either failure, or a major overhaul of its business model and image. Neither of which are going to offer any decent returns for years.

Intel vs. AMD

I have been giving some thought lately on whether to invest in Intel, AMD (Advanced Micro Devices), both, or neither. I have an open position in Intel November 22.50 calls, but those will be expiring soon and I’m not sure what to do next.

AMD has always been the underdog in the home PC processor market. I remember building PCs in the mid-90s and the choices were Cyrix (not a player in the CPU market anymore), AMD, and Intel. Cyrix and AMD were similar, both offering cheaper processors than Intel. From a consumer standpoint, AMD or Cyrix seemed to be the better option.

Once Cyrix dropped out of the market, it was was down to two. AMD continued to offer cheaper processors than Intel. Both companies were battling each other in regards to who could offer the fastest processor. As far as I’m concerned, the situation hasn’t changed a whole lot. AMD has been eroding into Intel’s market share mainly, I believe, due to their reliability improving and a successful marketing campaign in getting their name out, getting their products into stores, and getting their processors into some models of the leading PC makers. From that perspective, AMD is doing well. Every tiny bit of market share they steal from INTC means huge increases of revenue for them. The question is, why are they able to steal the market share away?

I highly doubt it is due to home users deciding that AMD offers a superior product for the price, the vast majority of home users just buy their computers from Dell or off the showroom floor and care about price and any nifty bells and whistles they get. As long as both Intel and AMD offer roughly the same speed processors, I don’t think the consumer cares a whole lot.

I think Intel has layed low on the situation over the last few years because AMD isn’t significantly hurting their revenues. Yes, Intel must remain competitive on price, but as long as they are close and maintain a good PR campaign, things will change slowly at the current pace. If there is a catalyst, the prize could go either way. If Intel or AMD have a large issue with manufacturing, reliability, or general supply chain issues, that could really change the playing field. Given Intel’s size, I’d give Intel the upper hand here and say AMD is more likely to experience a significant hiccup in their supplier, manufacturing, reliability story.

The next question is what is preventing Intel from taking back all/most of the market share they’ve lost? I’m beginning to think it comes down almost solely to price. Intel has the bankroll (7 times the sales, 12 times the net income, 3 times the cash) to lower margins on processors considerably and, while it would hurt their profitability, it would destroy AMD’s profitability. AMD and Intel are trading at nearly the same P/E ratios and, given who AMD’s competition is, I think this is quite a rich valuation.