“The Death Of Microsoft — And The Dawn Of Its Rapidly Growing Replacement”

Sniffing out Hilary Kramer's teased "Gamechanger #1"

By Travis Johnson, Stock Gumshoe, April 23, 2013

The Gumshoe faithful have been asking about Hilary Kramer and her latest teaser pitch, so we’re going to ID at least her “#1” idea here — and possibly we’ll get into the rest of ’em if there’s interest.

The basic idea is much like past ads from the Motley Fool and others — that cloud computing and the explosion of mobile devices will kill Microsoft, and that the small and nimble cloud and “software as a service” players will be the beneficiaries. Kramer calls this big theme the “Apple/Android hyper-portability megatrend” and the “Big Data” industry — the “story behind the story” in the tech sector, and the source of much of the strength in tech stocks.

And she pitches this “megatrend” as an “insurance policy” against stocks falling — here’s how she puts it:

“Finally, before the rally runs out of steam, you get The Ultimate ‘Stock-Drop Protection’

“Announcing an ironclad ‘insurance policy’ against the coming market plunge: a megatrend so strong is soars during all market conditions, making double-digit gains”

Sounds like a dangerous promise to make, doesn’t it? That’s why the “insurance policy” and “protection” bit are in quotes — in an ad, quotes mean “not really.”

Here’s some more from the ad:

“Yet with all this fear, I can help put your mind at ease.

“I’ve discovered a new gamechanger — a megatrend so strong it’s unaffected by dips, drops, and corrections.

“This megatrend is like a failsafe insurance policy for your portfolio from bad markets…

“…because it continues to soar upward during all market conditions.

“No matter what direction the S&P goes, this megatrend is always up. It seems to defy gravity, like a profit-rocket.

“This megatrend I’m talking about is inside the tech sector. That’s probably no surprise…

“The biggest, fastest movers are tech companies. They have the shortest journey to selling their products — and the least regulation….

“In fact, three unstoppable tech companies are rising so fast — sitting at the very forefront of this megatrend, they are changing the way we work, shop, and live.

“As I’m about to show you, these gamechangers are so consistently powerful, they have the ability to overcome any market drop… and will even continue to make new market tops”

I promised you that we’d feed at least the first of these “gamechangers” into the gaping maw of the MIghty, Mighty Thinkolator … so lets get ourselves some clues …

“I mean the countless new app programmers, cloud storage providers, and mobility networking companies. These products and services supporting hyper-portability are a major part of what’s called “Big Data.”

“And today, the megatrend toward Big Data is being championed by three gamechanging businesses.

“See for yourself, as I introduce GameChanger #1:

“… now, one company is moving in to deliver the final shot… by making hyper-mobility powerful enough to seriously challenge the PC.

“Now, why wouldn’t Microsoft make the transition to monopolize the mobile world? Simple. It’s because Microsoft is stuck in the PC world….

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“So Microsoft isn’t about to change from that revenue stream. Like all giant companies, it’s too bureaucratic and sluggish to change. In fact, the very term “change” is a dirty word in the corporate world.

“But one small and swift-to-respond company is about to take advantage of Microsoft’s sluggish nature… by serving the entire mobile market new software to make their devices more powerful….

“The company I’m excited about has a small size, which makes them maneuverable. They can turn direction on a dime. Whereas Microsoft is so big, it’s like turning around an aircraft carrier….

“Ironically, this small company is also making mountains of money from “enterprise” software, just like Microsoft. Yet their small size is enabling them to switch over to bold new software technology that’s optimized for servicing data from smartphones and tablets.

“Using this software, every Fortune 500 company will be able to manage their user’s many devices, giving them common access to software, data sharing, and servers, all on one network….

“So when this new company announced their shift to new software aimed at the web/mobile data arena, they captured the imaginations of corporations — and stock buyers everywhere….

“Already, this company is announcing a 40% customer growth rate through the end of this year alone.”

Now, that’s not a lot of clues — so we had to resort to checking the stock chart she included as a clue — she didn’t include any actual numbers on the chart, of course, that would make it too easy … but we can see the slope and the movements for the last three months or so.

(Stock Chart Copied from GameChangers Ad)

Which is enough for the Mighty, Mighty Thinkolator to give a pretty high degree of certainty to our answer: This is Splunk (SPLK)

Splunk is one of the new crop of data analytics and “big data” companies that went public over the last year or two, with tremendous revenue growth and customer growth and a great story and trend … and no profits. They’ve been reinvesting and hiring at least as fast as they’ve been increasing revenues, so it’s still very much a “future growth” story about planting their flag in the marketplace and building up enough of a sticky customer base and a differentiated product that they can transition, someday, to sustainable profitability. Analysts think they’re in the process of getting to break even this year, with profits — minimal profits, to be sure — to start flowing next year.

And it’s also a stock that has had a wild ride over the last six months or so — Splunk was called out as a short candidate by Zack Buckley, a young hedge fund guy, at the Value Investing Congress that I attended back in October (I sent a short note to the Irregulars on that during his talk but never acted on his short recommendation, his full presentation has been put up online here if you’re curious).

Buckley will also be speaking at this next Value Investing Congress in a couple weeks in Las Vegas, and I’ll again be reporting from there for the Irregulars and looking for ideas to share with you, so maybe we’ll see if he’s changed his tune on Splunk or covered that short (his attention helped the shares to crater, from $38 or so down to $26 by November, but after walling for a month or two it started to climb again and is now back above $40 at all-time highs).

And yes, Splunk does forecast that they will increase their customer count by 40% this year (their fiscal year ends in January, not December, just FYI), so that’s obviously a good harbinger of potential revenue growth. They also have essentially guided investors to expect a break-even year, so the analysts aren’t just making those numbers up.

As to whether they will build a defensible business in this very competitive industry, I don’t know — they do have both cloud and enterprise applications, and they do provide a variety of IT management products for companies, though their niche seems to be mostly in data analytics — collecting and managing data from a variety of sources and making it accessible and useful, including on mobile devices. Part of Buckley’s criticism of Splunk was based on the fact that they don’t have the “annuity” income stream that many “software as a service” or tech services companies enjoy, much of their revenue comes from up-front license fees.

I think that you’d probably have to get pretty comfortable with the company’s software and understand how it stands out against competitors before buying this stock, but that might just be me erring on the side of caution with an unprofitable growth stock. They have kept the operating expenses growing at almost exactly the same pace as the revenue, so although that means they consistently lose money (basically, they lose whatever the “cost of sales” is — roughly 10%, nice and low since they’re a software company and enjoy high gross margins) — that does indicate that they’re actively adjusting the company’s investments (in people and R&D) to that growth, which I think is a good sign, though they haven’t had a chance to prove to us that they can do so if they have a few bad quarters with much lower growth.

Splunk is only a year or so old as a public company, but so far their only quarter without sequential growth was the first quarter of last year — the April quarter — so if there’s any seasonal weakness to be had, now is probably when we’ll see it (the current quarter’s earnings release will come out in about a month).

And as to whether this trend benefitting “big data” and mobile data access and the cloud is really “insurance” against one of the stocks falling and scaring the pants off of investors, at least for a little while … well, we don’t have to look far to disprove that notion, just check out SPLK’s big drop last Fall, or the several abrupt 10-20% drops for much larger (and abundantly profitable) Tibco Software (TIBX), just a couple examples pulled out of the hat. I expect this trend will continue to have plenty of room to run, with data analytics and mobile access to data becoming ever more important, but that doesn’t mean this one company is guaranteed to not trip over its own shoelaces (or get pushed down, by stronger or more bundled offerings from IBM or Oracle or Cisco or whoever … or even Microsoft).

That’s just my musing, I don’t understand Splunk’s business very well and I’ve never seen their products in action — if you look at the financials you can justify either a very skeptical pose (they have to spend more than a dollar to bring in each dollar of revenue) or an optimistic one (they’re growing revenues at better than 50% a year, and say they can keep doing so, which means they’d eventually have to grow into profitability … right?).

That’s my quick look — and I’m pretty sure the Thinkolator’s right about this being the “Death of Microsoft” stock teased as “The Ultimate ‘Stock-Drop Protection” by Hilary Kramer … beyond that, you’ll have to cogitate on SPLK yourself and make your own call. It is, after all, your money, and if you let me handle it I’m sure I’d spend it all on bubblegum and comic books.

If you’ve a hankering to share your thoughts please do let us know what you think of Hilary Kramer, or Splunk, or “Big Data”, with a comment below.

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April 23, 2013 3:57 pm

Wow. That is one complicated software. I ran their video of their new 4.3 version and after it was over I realized I knew nothing of what they were saying. Maybe my 16 year old son does but I don’t. So I don’t invest in anything I don’t understand.

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