Exaflood Does Not Make Sense

Another nice weekend on the east coast of the US and there is so much to think about that happened over the past week.   CSCO spent five billon of their off shore pile of cash on a video company.  ADTN announced a terrible quarter to start the year.  These two events are part of the conundrum of the past 10-11 years that when I hear people telling me how the internet is going to break, the upcoming exaflood and video is a huge problem it makes little sense to me.  At first I was going to write a big post with all sorts of charts, but the weather is too nice and I am not going to bother with the details.  It might be better to just state my opinion and if you feel differently go ahead and put money to work.  Just remember:

Innovative, Alternative Technology Solutions = Velocity

Developed Technology = Spent Capital, Doctrine, Incrementalism and Creativity Fail 

  • Since 2001 mobile phone and now smartphone growth has been great.  We have more smartphones and now tablets that sales exceed a billion devices a year.  2G went to 3G and now 4G…all of it means more devices using more capacity.
  • Many of the local loop upgrades are done in the US.  DOCSIS 3.0, FTTx, xDSL…yes, we have solved the local loop bottleneck.  It took ten years, but we are on our way to universal broadband.
  • OTT video is everywhere and soon we will have 15 or more NFLX copy cats and that is because content, especially video is a DIY content solution
  • File sharing, Dropbox, Box.net, Megaupload, S3…yes we have storage in the cloud
  • State aware apps like Gmail are the norm

All of these drivers of bandwidth are ongoing in the ecosystem and yet service provider CAPEX is lumpy!  CSCO has to buy a software based STB/codec company and ADTN who is in the heart of the local loop upgrade market has a huge miss because service providers CAPEX is lumpy, spotty, insert word of your choice.  Go look at any 10-year weekly chart of a service provider communication equipment company and you will see that the trend is down.  If the traffic trend is up, why is the equity value chart trend down?  Enough said on my part on the subject.

The NYT reported that CSCO was supporting a spin-in startup called Insieme.  I have a lot of thoughts on this subject, but I am going to take a few days to collect and organize my thoughts on the subject.  It will be the topic of my next post.  I posted some additional thoughts over on the Plexxi blog as to what I am seeing in the DC market.



* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

On the Eve of Earnings

We are on the eve of a lot tech earnings over the next few weeks.  ADTN reported last night and hosted their call this morning.  Guidance was in line and the business was good, but not good enough to sustain the current multiple if you have been a recent buyer.  Look at a 10Y weekly on the company.

Any questions?  I did not like so, but in case you missed the point of the chart it tells me that the multiple got stretched and it was prudent to sell as the price level was in an abnormal position.

Decisions, decisions, decisions…what should a tech investor do?  As for concerns we have a lot to choose from: US Govt debt ceiling fight, end of QEII, Japan nuclear mess, consumer spending, unemployment and looming confrontation on sovereign taxes.  From a macro perspective it is hard to be excited and easier to be bearish.  Maybe sell in May and go away is a prudent action.

Here is my first attempt at setting up the first portfolio post of the new blog which is a work in progress.  As I have more time to post, I will expand on the details in the portfolio section, but to start I will look at the portfolio from a sector basis and add equity detail in the sectors in the future.  The general approach is 14 sectors composed of ~65 sub sectors and ~800 equities.  Today I will start with the 14 primary sectors.

Sector Equities Bias
Semi Equipment / Process 29 NEUTRAL
Semiconductors – Legacy 25 SHORT
Semiconductors – Core 58 LONG
ODM, EMS, Disty, Photonics 42 NEUTRAL
Hardware – Commercial 29 SHORT
Hardware – Personal 24 LONG
Networking – Infrastructure 53 LONG
Software 61 LONG
Service Providers 103 SHORT
Internet 28 LONG
Digital Media 21 LONG
Clean Tech – Solar, Power, Water 133 SHORT
Consumption 8 SHORT
Materials 29 NEUTRAL

– GC