Another Monday morning, another “next wave of the internet” teaser.
This teaser comes in from the Oxford Income Letter, edited by Marc Lichtenfeld over at the Oxford Club, and it’s a bit of a departure from the crazy small cap names he has more often touted of late (usually for his MicroCap Tech Trader newsletter). So it’s also nice to know that we probably can’t have any impact at all on the stock price by writing about it for you today.
We’re also getting a little perspective today on different kinds of pitches for the “Internet of Things”, since that’s what Lichtenfeld is touting as his “Web 3.0” revolution — we’ve also just this week seen a big re-push from the Motley Fool for their very similar “R.I.P. Internet” pitch. The Fool was (and is) touting Sierra Wireless, a maker of the wireless modules that make the interconnected world possible, Lichtenfeld is touting someone different.
Who, you ask? Let’s check out his ad. It starts thusly:
“What I’m about to show you will have a profound impact on millions of Americans.
“According to Newsweek, a new innovation is about to ‘change daily life, much as electricity once did.’
“In fact, Congress just fast-tracked a bill that will integrate a major piece of this new tech all over the U.S., starting early next year.
“Slate is calling it ‘the Internet’s next big frontier.’
“I’m calling it Web 3.0.”
The fast-tracked bill that Lichtenfeld is talking about, H.R. 658, became law over two years ago — that was an FAA modernization bill, and the part Lichtenfeld is talking about is drones, the requirement that the FAA must develop some sort of way to safely include drones (unmanned aircraft) into the national airspace system.
That’s actually a smaller part of the pitch, I think, since the headline of “Web 3.0” is more about the “Internet of Things” that we hear so much about. Lichtenfeld is tying them together, since the increasing use of drones will create more interconnected data, and drones are likely to eventually be wirelessly connected to the web for both data collection and control (and indeed, if facebook’s investments are to bear fruit, to provide internet access to some areas).
But his pitch for a drone manufacturer is more of an afterthought, let’s look at the first company he touts as a “secret” pick for his Oxford Income Letter.
“… this Internet ‘update’ will affect you. You don’t even have to own a PC… tablet… or smartphone.
“Web 3.0 will literally be everywhere. Inside your car… in the skies… at your local grocery store… even in your refrigerator…
“Not since the early 2000s has there been a tech opportunity as explosive – or as surefire – as this one.
“The profit potential here is bigger than Bitcoin… bigger than 3-D printing… and, yes, even bigger than the iPhone.”
Enough to get you excited? The “Internet of Things” stuff has been talked about for a long time, particularly for the home and including everything from smart refrigerators that know your shopping list to the Nest smart thermostat that was bought by Google, but as sensors become smaller and connectivity becomes even more ubiquitous the applications for all kinds of businesses will be limited only by economies of scale and imagination. And, of course, by whether or not customers want things more connected. Here’s a bit more on the big picture stuff from Lichtenfeld:
“You see, Web 3.0 takes the Internet and projects it literally everywhere.
“As The Futurist puts it, ‘the Internet is no longer just a global network for people to communicate… it is also a platform for devices to communicate electronically with the world around them…’
“Think about it…
“What if your medicine cabinet could track your prescriptions and automatically order refills?
“Or if the traffic signal at the end of your street could adjust its pattern based on the number of cars on the road?
“How about an ATM that can recognize human distress signals and notify the police if there’s trouble?
“Web 3.0 is going to impact nearly every facet of life.
“According to Gartner’s head of research, Peter Sondergaard, ‘We won’t know it is there; it will be in our jewelry and in our clothing. We will throw more computers into our laundry in a week than we’ve used in our lifetimes so far….’
“After Web 3.0 officially launches next year, ARM is predicting that number will balloon to 15 billion.
“By 2020, an estimated 200 billion of these devices will be online – that’s 26 smart objects for every human being on Earth.”
So which stock is Lichtenfeld teasing today? Well, this is apparently another one of the “infrastructure” plays — not one of the companies that will sell internet-connected egg trays for your refrigerator, but one that supplies chips or networks or something like that. Here’s how he starts hinting at it:
“But there’s one tech company that stands to profit more than any other…
“According to Daily Finance, it’s “right in the middle” of the Web 3.0 boom.
“Big names like Amazon, Yahoo and eBay already depend on its services to generate billions of dollars in revenue.
“But when Web 3.0 takes hold, ZK Research predicts this behind-the-scenes company could become the ‘number one IT vendor’ in the world.
“Because it’s essentially ‘laying the tracks’ these billions of smart objects will run on…”
OK, so it sounds like it’s certainly an established company (this is, after all, an income-focused newsletter, not a hot-new-thing growth tipsheet). Let’s see if he spits out some more tantalizing clues that we can feed to the Thinkolator …
“The company has developed a new framework built specifically for ’emerging [Web 3.0] applications.’
“It’s the first of its kind.
“One report cited by PC World says it will ‘help [Web 3.0] devices operate when network connections are lost.’
“Meaning your smart objects won’t stop working when your Comcast service is down….
“Business is already ramping up for the company behind this innovation – growing at a rate of 35% – 45% per quarter.
“To give you some idea of how fast that growth rate truly is… It’s like if Apple were to introduce a product as revolutionary as the iPad every three months!”
And then we start to get a couple clues about the financials and about the stock:
“… this isn’t some fly-by-night tech firm. It’s been operating in the Internet space for decades.
“The only difference: it doesn’t get the same lip service as companies like Apple, Google or Amazon….
“If you could get Apple for 1/20 the price… or Amazon for 1/15 the price… wouldn’t you want to take advantage of that?”
Well, Apple is three times the size of Amazon so that tells us that either Marc’s copywriters aren’t so good with math … or they’re being intentionally misleading by using price-per-share to imply that this lesser-known company is 1/20th the size of Apple (by that measure, ExxonMobil (XOM) is one quarter the price of Apple, when in reality the two companies are roughly the same size and Apple’s enterprise value is actually quite a bit smaller). Buying ten shares of a $400 stock or 100 shares of a $40 stock are exactly the same thing unless you’re using options strategies like covered call selling that require 100-lot share positions — what matters is the amount you invest, the valuation of the stock, and the size and market capitalization of the company. But we’ll get off that high horse so we can sift through to see if there are any more clues.
“… this stock doubles as a growth play and a powerful source of income…
“… the company has already lifted its dividend four times since 2011….”
So…. who’s being teased today? The Mighty, Mighty Thinkolator tells us that Lichtenfeld is recommending: Cisco Systems (CSCO)
Which does not get as much lip service as Amazon and Apple, I grant you — but it sure did 10-15 years ago, and it’s one of the largest companies in the world. Cisco’s market cap is about $115 billion, so it’s smaller than Amazon but is, of course, far, far more profitable (Amazon is intentionally unprofitable, they’re continuing to reinvest everything in growth). It falls into that “old tech” category that has reawakened recently, with investors turning with interest to stocks like Microsoft (MSFT), Intel (INTC), IBM (IBM) and the like who are cheap and can pay growing dividends.
Cisco is certainly in that group — they are very cash rich, with about $30 billion in net cash on their books, and they can pay an increasing dividend even if earnings don’t grow (as they haven’t lately). The rub with Cisco is that their core businesses in networking equipment are competitive — and the fear is that they’re not going to be able to maintain decent profit margins as long as they’re competing with the Huaweis of the world who can make commoditized switches and routers more cheaply. They’ve also spent a lot of their cash over the years buying back stock to help make up for their dilution through employee stock options, and at buying other businesses to help to spur growth or keep a stranglehold on their core business (with mixed success — their consumer-facing businesses have been particularly disappointing, like the Flip video camera, but their WebEx video conferencing business and some services have done better).
But if you ignore the quarterly bloviating from John Chambers, the company’s financials look fantastic. They’re not growing in their core businesses, and that’s not likely to change in the next few years, but if you think their small “Web 3.0” business (they use the “Internet of Things” phrase) will help to spur growth in the next few years that could become a meaningful part of their business over time. Chambers was at the Consumer Electronics Show this year touting their “Internet of Things” initiatives in case you’d like a taste of that future optimism.
This year’s a bit up in the air for Cisco, there’s pretty wide expectation that they’ll have revenues and earnings that are slightly lower than last year, and that they’ll get back to very tepid growth (as in, a couple of percent at most) in 2015… and beyond that, perhaps the “Internet of Things” will be driving some growth for them but we’re really guessing. Expectations are low, and the valuation is decent, so I wouldn’t expect the stock to double in the next couple years … but it certainly could be a fine investment, it probably doesn’t get enough credit for its dominance of the networking business, and it does pay a 3.4% yield.
Not too different from the pitch for Verizon (VZ), which was teased last week as “NuCable” for the way it’s going to revolutionize cable TV — it’s a fine company and a reasonably valued stock, but the hyped-up tease is likely to lead to disappointment if you think of it as a “get rich quick” idea. I’d classify these as “get rich very slowly” dividend compounding stocks — probably far safer than shooting for the stars, but not likely to cause any drooling among the day trading and quick-hit crowd who favor fast growing thrill rides.
CSCO has bumped up and down between $15 and $30 for most of the past ten years, usually not too far from the low $20s where the stock now sits — during those ten years the sales and earnings have roughly doubled, with some cyclicality, but, as is so often the case, the growth expectations have gradually shrunk and brought down the valuation. Looks like they’re in decent shape now with a PE that’s lower than the overall market, and they have been lifting the dividend and shrinking the share count for several years to provide a bit of a floor under the shares in the high teens, but it would be pretty shocking to see the stock really catch fire.
Sound like the kind of stock you’d like to buy? Too boring? Think they’re in perpetual decline instead of just in a soft spot? Let us know with a comment below.
I do own Verizon, Intel and Apple among those stocks mentioned above, just FYI, and I won’t buy or sell them (or any other stock covered above) for at least three days per my trading rules.
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