Wednesday, August 17, 2011

Thank you, Google

Until a couple of days ago, everybody seemed to hate Motorola Mobility (MMI).  After separating from the Motorola mother ship in January and briefly hitting $36 a share, MMI did nothing but go down.  So it was destined to continue, right?

Naturally, there were plenty of "brave" individuals who jumped on the negative bandwagon.  After all, MMI was not Apple... and for many investors, this is enough to warrant a "SELL" rating.

The author of "Motorola Mobility Gears for Smartphone Battle" recommended that investors SHORT Motorola Mobility in April... at $24 a share!  The argument was typical.  Shares were falling, but still expensive. Earnings estimates were uncertain and competition stiff.   In short, MMI was the next Nokia (NOK) or Research in Motion (RIMM).  Likely on a one way trip to oblivion.

Now, we love spin-offs and had started looking at MMI closely after the huge drop from $36 a share ($10.6 billion) to $24 ($7 billion market value).  And we are always looking for analysis that disproves our thesis, so naturally I read the above article.  Even if the thesis was correct, I thought the "short MMI" recommendation was absurd. 

In response to the article, I posted the following:

Some further back and forth ensued about the balance sheet and short term earnings estimates.  To which I responded:
By this point, I was convinced that most investors could not see past the end of their noses.  And MMI quickly became a holding in the portfolio.  Here was a company that was recently independent, with nearly 50% net cash, and investors were focused on next quarter's earnings.

I kept pointing out that free cash flow was nicely positive at MMI despite lousy earnings numbers.  And I was asked in return - "Is $107 million in net cash generation from operations on $3 billion in revenues significant?"  Well, when the enterprise value of the firm is $4 billion or less, then the answer is "yes".  That may not be Apple-type money, but then again MMI is was a $7 billion company, not a $300 billion one.  And $100 million a quarter is pretty good when the underlying business is valued at $3 billion or so.

But by July MMI had indeed issued a less than stellar earnings report.  And the bears were in full  effect.  Yet more articles appeared suggesting that the right course was to short MMI shares.  Perhaps my favorite is this one -  Motorola Mobility Bulls are Wrong Again.

And my favorite quote:
Bulls seem to be encouraged by the price that Northern Telecom’s patents fetched in a recent auction. Bulls either ignore or do not understand that Northern Telecom went bankrupt. For an ongoing concern like Motorola, it is very difficult to monetize patents and receive a value anywhere close to an auction price. Simply put, it would be suicidal for Motorola to auction off its patents.
It is time to sell this stock and aggressive investors may consider short selling it on any major bounce. I plan to short sell this stock on a major bounce.
I wonder if the author is short after this week's "major bounce"?

In any case, I tried to counter this line of thinking as follows:

 Some readers countered by saying that MMI lacked earnings growth! 

Was my frustration beginning to show?

All along, I was not all that sanguine about MMI's earnings outlook... just that the company's assets more than supported a very depressed (and now even lower) market value.  So around this time, I doubled my MMI holding.  With MMI's balance sheet, investors were not paying for any earnings growth.

Congratulations to Josh Pritchard, a commenter who obviously shared my underlying thesis:

Nonetheless, an MMI buyout remained a laughable idea for many.  Following the Nortel patent deal, the smart money was convinced that Interdigital (IDCC) would  be the next target.  It was reported with near certainty that a deal was almost done.

Here is an example: Google Plays the Trump Card, Locks Sights on Interdigital.

But the IDCC speculation seemed a tad optimistic considering the valuations being discussed.  Where were these people when IDCC was in the 20's?  (Full disclosure: I bought it there... and sold in the low 50's).

For my money, MMI looked like the better value.  But the IDCC fans were quick to ignore a larger patent portfolio at MMI, probably due to a fixation with the company's (in their minds' inferior) products and short-term results.  In one comment on Seeking Alpha, I made fun of the new "price-per-patent" metric.

All joking aside, it looks like Google uses very similar math.

What was a pie-in-the-sky number for me was a reasonable price for Google. Our price target all along was $30 a share, so buying in the low 20's seemed to make sense.

True, the Google buyout of Motorola Mobility was a kind bit of luck.  That said, those urging a short of MMI should be chastened.  Companies that have huge net cash positions and positive free cash flow can be very dangerous short sales. It is also a lesson to anyone reading online research articles.  Always consider the source and do your own homework.

Sometimes it is enough to realize when negativity is overdone.  With MMI, it got positively ludicrous.

Lucky?  Smart?  Perhaps a bit of both.

Many thanks to my friends at Google... I sold MMI yesterday at $38+ a share.  Over 60% in 4 months is just fine!

Also thank you to all the people who helped solidify my investment thesis by forcing me to question and defend it.

For all you technicians out there... Is that a pretty chart or what?!!

Disclosure:  Long Nokia, Short Amazon.


  1. Very nice. I generally steer free from tech but will be posting shortly on my latest play in that arena. looks like you've been quite successful with these companies.

    I like the analysis- good job holding these hypesters accountable. Nobody really realizes they're gambling & it's good to point out every once in awhile.

  2. so you got lucky once and crow about it?

  3. Looks like MMI panned out but Nokia didn't. Are you still holding on to Nokia shares? If so, do you think the prospects for Nokia looks even better then before? Conversely, if you exited Nokia at a loss, then what's the post-mortem on that purchase? What's the difference in your opinion that made MMI investment a success but Nokia not so much? Thanks, and really enjoyed reading your blog.