That’s our pitch today — that the new “themed” technology investments being teased by the Motley Foolians are as good as David Gardner’s push for AOL and Amazon.com back in the days before the Motley Fool published their current Stock Advisor newsletter.
The ad letter actually comes in from a different Fool employee, Todd Etter, though it’s all about the ideas being pitched by the Gardner brothers in their flagship letter, and the stock ideas they’re holding above our heads (jump! Just a little higher! Only $49 now!) are all built around the basic idea that instead of people learning how to use confusing computers, the world is moving toward computers learning how to understand people.
Or, as David Gardner titles his “special report”: “Voice + Prediction + Gesture = $$$”
Incidentally, the Foolies have dramatically cut the price of Stock Advisor — at least in the email pitch I received, they’re down to $49 and the last pricing I had seen before that was, I think, $199 … I wonder whether they’re testing the strategy espoused by the Agoraplex newsletters and starting folks off with a low price to get them used to paying something, then pitch them on “upgrades” more aggressively to get them into the more expensive letters in the years to come. I guess we’ll start to find out as the next crops of teasers roll through. (The list price is still $199 on their website, FYI, so maybe they’re just testing out some sale prices.)
So what’s the big idea? Well, the title of the report pretty much says it all — the companies behind voice recognition, gesture recognition and big data (that’s what you use to predict behavior) are going to make us rich. Etter tells us that much of this advance came from video gams.
“… one thing I’ve learned from being a professional game maker and game player all these years is that a lot of real problems — in education, in medicine, and even in defense & security — were solved by innovations that first appeared in video games.
“Which is why, when I first heard about David’s newest investing idea, I knew right away that he was onto something big.
“Because I had already seen it in the video games my kids were playing.
“It just hadn’t dawned on me yet that it would be the perfect solution for so many of our daily aggravations. Or that it would be so easy to use, and work as well as it does….
“I also didn’t realize that scientists at M.I.T. were calling it ‘the most important new technology since the smart phone.’
“That major corporations like McDonald’s, Toyota, Microsoft, Intel, Samsung, GM, Sony, and Bloomingdale’s were scrambling to implement it.
“Or that major hospitals like Miami Children’s Hospital and the National Naval Medical Center were already relying on it to treat their patients.
“And I certainly didn’t know the 3 companies that David had selected for his newest investing strategy, or why his research made him so confident about them.”
So that’s the basic spiel … what, then, are our three companies? He teases them one at a time — the first one is the voice recognition pick:
“It all starts with the power of your voice….
“… if you’re like my wife and me, the solution you’ve already fallen in love with is “Siri”…
“That’s the name of the voice recognition program on Apple’s new iPhones. (You’ve probably seen Samuel Jackson and Martin Scorsese using it on TV.) …
“But here’s the really interesting thing… Someone else gets a fat cut of the profit from every single one of those iPhones! And it’s a company very few investors have ever heard of…
“See, the Siri voice recognition program wasn’t invented by Steve Jobs. Or by anyone else at Apple.
“And even though Google and Microsoft are using the same program in 540 million other devices, neither of them invented it either….
“… the little company that does control the key patents for what scientists like Steve Rizzo at the University of Southern California are calling ‘the holy grail to technology’… can sell it to whomever they please….
“…stocks like this one, which benefit from the success of Apple and the other technology giants — but require a bit more savvy to discover — make such good investments.”
Now, tying your stock idea to Apple (AAPL) has been less of a successful pitch in recent weeks … but we’ll let that pass (and I’m still a holder of Apple stock and think it has gotten ridiculously cheap, if you’re wondering which side of that fence I stand on).
More clues about this first pick? But of course …
OK, so those are accurage quotes and that’s real information, albeit not a full picture, but it ignores my favorite quote from that same Bloomberg Businessweek article: Dave Grannan, CEO of Vlingo, was quoted as saying that “Competing with Nuance is like having a venereal disease that’s in remission.”
“According to Andrew Rosenberg, a computer science professor at Queens College in New York, the company that controls this voice recognition technology is ‘the equivalent of Microsoft, Google, or Amazon in a very niche technological space.’
“And with 43 different strategic acquisitions over the past six years, and a war chest of 2,016 patents, it’s easy to see why he’s comfortable making such a provocative comparison…
“Bloomberg BusinessWeek took things even further. Calling this CEO ‘every bit as powerful as Steve Jobs.'”
And yes, this first teased pick is the dominant voice recognition technology company, Nuance Communications (NUAN). Which, perhaps not surprisingly, bought Vlingo about six months after that quote.
Nuance does own the technology that helps to power Siri, we’re told (I don’t think Apple has officially confirmed that still, but it’s widely believed that Nuance is involved — and it’s hard to imagine that they wouldn’t be), and they have indeed been extremely acquisitive over the years in adding new technologies and patent portfolios to their quiver … and they are not, frankly, all that expensive if the analysts are estimating well. The company has finally started to generate some real revenue and profit growth over the past year, growth that analysts believe is sustainable, and while it’s probably wise to be a bit skeptical of a company that has been so acquisitive and such a “next year” story for several years now, there is a growing trend toward voice recognition from more and more of your gadgets, from your TV remote to your car.
Of course, Nuance, despite being quite aggressive in the courts, does not own the whole idea of interfacing with machines via voice — and there are projects at most of the big software and mobile companies to develop better voice controls, too, including from Microsoft and Google. So we can’t necessarily draw our straight line on the graph and say that Nuance is going to own the “Siri” of the future … but you can definitely argue that if anyone’s going to win that race, Nuance has the pole position.
They’ve gotten consistently better at turning sales into free cash flow in recent years, and in generating more cash flow than earnings, so that’s a good indication that the business is “real” and has some staying power — though they also turn a lot of that cash into investments in acquiring little bolt-on companies, and they’re pretty free with the stock grants to management. There is good insider ownership, and a couple of large institutional shareholders, but there has not been any insider buying in the recent past. Right now they’re trading for 12X the expected earnings for this coming year (their fiscal year ends in September, but we haven’t seen December quarter numbers for NUAN yet so that’s really just the forward estimated PE). That’s coupled with earnings growth that is expected to be about 10% in 2013, and projections that they can grow earnings by better than 15% a year going out into the future … so if those numbers work out as the analysts expect NUAN is certainly worth buying here — that’s a low PEG ratio and a stock with a good “theme” story behind it, and they have done a little bit better than analyst estimates over the past three quarters.
Of course, that depends on NUAN continuing to lead this technology and getting more clients and more installations, leading to more revenue — much of their revenue in the past has come from older technologies and businesses, particularly stuff like medical dictation, so there’s plenty of risk that as voice integration becomes mainstream it might take away some of the barriers to entry for other companies. Nuance did recently win Hyundai’s business in developing a new voice system for their next generation of vehicles, and they’ve had similar systems in other cars for a while, but we don’t really know how much revenue that turns into in the future. They also own the only real brand in the voice recognition space, Dragon, but I don’t know whether that brand really means anything just yet.
So … mercurial CEO that people love to hate, lots of patent lawsuits, rumors of an attempted takeover by Apple about a year and a half ago, and lots of dreams about the future of talking to your TV or your car in plain language, and you can see why Nuance gets a lot of press. Beneath that chatter, however, is a company that has managed to scare off or acquire most of its small rivals, and that has pretty quietly become reasonably priced … the growth for this current year isn’t dramatic, but at a PE of 11 or 12 you don’t necessarily need dramatic growth. The shares have come down a bit this year and there isn’t any particular momentum to either the earnings growth or the stock price, but it is in a potentially growing industry and it’s not expensive. I don’t own the shares and never have, but as it dips down here I’m starting to think that maybe it’s worth taking a deeper look.
How about the second idea pitched by the Fool?
“… it’s time to meet our second hidden Silicon Valley power player.
“And find out how Apple got a leg up on Microsoft when Steve Jobs went to seek out this visionary CEO’s advice about prediction software.
“We’ll also discover why Jobs trusted this man as a mentor… literally driving to his house at one point to sit on the floor at his feet.
“And finally, we’ll see why 134 of the world’s 200 biggest corporations have trusted their future to this tiny company’s one-of-a-kind technology solution.
“Remember, the key is prediction. Computers can’t really think like we do, but with this cutting edge software, they can learn….
“… when Wal-Mart came looking for an ‘impossible’ 60% bump to its sky-high profit margins, this company used its prediction software to show them a new way to sell popular items like Strawberry Pop-Tarts… seven times faster!”
Seriously? Wal-Mart’s profit margins are only sky high if you compare them to Amazon’s. I can’t think of many large companies that have smaller profit margins, WMT’s overall margin is right around 3.5% and not high even when compared with peers like Target (4.2%).
OK, they’re high compared to grocery stores, which often have profit margins below 1%, so we’ll accept the pop tart reference … but grudgingly.
“[David Gardner] went on to say that it’s widely known among technology insiders that this company simply makes this software better than anyone else does.
“(Even the mainstream media is starting to catch on… For example, CNBC’s Jim Cramer says this ‘scrappy company’ has ‘a major edge on the competition,’ and admits that the way it’s been overlooked by Wall Street insiders is ‘kind of ridiculous.’)”
So … hoodat? Well, the two possibilities are both stocks that have been recommended by the Motley Fool, Tibco Software and Teradata … and both have been mentioned positively by Jim Cramer over the past year as well, but the fact that we’re talking primarily about software to understand this predictive data (rather than systems to store and organize it — Teradata is a data warehouser, Tibco a software company) leans toward Tibco, as do the specific quotes about being “scrappy” from Cramer. So I’m pretty sure they’re teasing Tibco Software here, symbol TIBX (though Teradata was specifically involved with those Wal-Mart pop tart epiphanies, back when it was a division of NCR … the story was that Wal-Mart used data mining to discover that people stock up on pop-tarts after a hurricane and therefore increased pop tart sales dramatically by stocking heavily into predicted hurricane areas. I don’t know if Tibco was working with Walmart at the time or not.)
And yes, that story about Steve Jobs sitting on the floor in front of the CEO is true, that was way back when Jobs had been fired from Apple and was starting fresh and wanted some guidance from Vivek Ranadive, who hadn’t yet started Tibco but was well respected for building and selling technology.
Tibco is a company I’ve been intending to take more of a look at as they’ve seen their share price drop — Ranadive is somewhat of a “big data” evangelist and he has built a business data integration company that is platform agnostic, with an incredible capacity to process and interpret reams of data. That may be important because many of the competitors work primarily or only with their own data systems, whether that’s Oracle or Salesforce.com or IBM. They have thousands of customers and have had a steadily growing business and slowly improving margins for several years now, but over the last year or so they’ve also seen earnings growth decelerate and, in the last quarter, a bad miss that brought the shares down sharply.
I don’t know whether or not TIBX will do better than expected over the next couple quarters, but their reduced guidance and disappointing numbers last time around still clearly have investors a bit nervous — analyst estimates have come down over the last couple months for both the current year and for next year, so we’re dealing with a very profitable company in what should be a growing business, but one that’s either facing increased competition or simply having internal trouble in managing their sales (they say it’s the latter).
I’m intrigued by this one, I’ll have to dig deeper and see if I can get comfortable with the reduced expectations — Tibco is not particularly cheap, they have big competitors and they’ve grown to a substantial size (about $4 billion market cap) now, and investors are wary … but they do have a good, high margin business and a recurring customer base, a strong toehold in the “big data” trend, and a strong leader, so the story is nice and solid … it’s just a question of whether we can be confident about the size of future revenues.
“The last piece of the puzzle is now ‘at hand.’ Silicon Valley types call it gesture control.
“And like I said before, if you have kids, you might have seen crude versions of this device before… in their video games.
“I doubt I need to explain to you why it’s a necessary complement to voice control — maybe even an improvement on it. And why it blows all of the old “user interface technologies” out of the water.
“Of course, there are bound to be skeptics. Remember the people who said they’d never use a computer mouse?
“But gesture control is just the next logical step after the mouse and the touch screen. As Dr. Mark Bolas at the University of Southern California points out, ‘when using a computer today, we think of our bodies as a fingertip or at most two fingertips. But humans evolved to communicate with their whole bodies.’…
“David’s investing strategy for this third and last part of his technology “triple play” didn’t lead him to a small, start-up type company.
“Instead, it led him to one of the most powerful corporations in the world.
“See, he believes they’re the only company with the R&D capabilities to refine this technology further — they’ve already developed a next-generation gesture control program that allows you not only to wave, swipe, and pinch your commands for a built-in camera, but also to use any surface in your house, including your couch cushion, your coffee table, and even the water in your drinking glass as a virtual touch screen.”
OK, so this one’s nice and easy, as several folks have noted — that’s Disney (DIS), which was similarly touted by the Fool in their “Television 2.0: The War for Your Living Room” teaser pitch a few months ago. The cool new remote control and technology stuff is part of their Disney Research arm, including several different touch- and gesture-oriented research projects … and maybe some of them will eventually migrate into your TV. But don’t worry, for now the cost of goods on the buffet table of the Disney Wonder cruise ship is going to be more meaningful for the bottom line than are these various R&D projects.
Disney is a technology company to some degree, of course, but their core skills are storytelling and merchandizing … and they do it better than anyone else. This is a stock that I’ve often intended to nibble at, but my timing has been bad and I’ve never actually followed through and bought shares — I think they’re in a tremendous position competitively with their Pixar, Lucas Films, Marvel and other creative franchises, and as importantly with their ownership of ESPN and it’s massive leverage over live sports coverage, but every time I sniff around the shares I walk away thinking, “eh, maybe I can get it just a little bit cheaper”. Last time was a couple months ago when they made the deal to buy the Star Wars franchise and bring out the next Star Wars film, the stock dropped a couple dollars, I and I thought to myself, “just a bit more and then I’ll buy.” But no dice, the stock bounced right back up.
Disney is not a particularly expensive stock, but it is a mega cap company with a market capitalization around $90 billion so you have to temper your growth expectations. If they can continue putting up growth numbers in excess of 10% a year, this is going to be a great investment even if you buy it here near the 52-week highs … but the skinflint in me, for some reason, keeps hoping that the flu epidemic will cut the gate proceeds at Disney World, or they release another awful and expensive film like John Carter, and then I’ll be able to jump on a slightly better price. I should probably just buy five shares a week and forget trying to pick a bargain, but where’s the fun in that?
So those are the three picks from Dave Gardner for this new revolution — I think it’s probably a stretch to buy Disney based on haptics and gestures, and there are plenty of other plays in data integration and “big data” to go along with Tibco, but they’re all reasonably priced firms with real profits and at least some potential to grow into new businesses as human-computer interaction continues to evolve. Got a favorite from this bunch or elsewhere in the field? Let us know with a comment below.