Fi Fiber Fo Fum, I Smell the Blood of a Telcoman

Long anticipated Google Fi is here. Specifically uncovered in regulatory filings last fall, providing a (good) network was a natural extension for a firm whose growth comes from increased internet usage.  It turns out to have been considered since at least 2007.  On Fi you’re on a, you guessed it, Wi-Fi network first.  If none is available you get Sprint and T-Mobile’s Network, whatever is working best at the time. No doubt Google’s wireless network to come to help replace, ahem, compliment them.

This comes on top of — and ultimately related to — Google Fiber.  One report a year ago had Google Fiber winning 75% market share…and 30% of low income households where after all the service at 5 megs is free.  Who cares if Time Warner and Comcast had merged or not?

Free – or less than free – is tough to beat, and the writing is on the wall.  Verzion and AT&T have higher quality networks…for now.  As Bill Gurley says in the link regarding the GPS market:

Despite these challenges, it would be a dangerous strategy for any of the many threatened players in these markets to hang on to this “quality” rationalization for very long.

It’s hard to see how the cable and telco stock prices haven’t tanked in anticipation of the forthcoming price war against Google that only Google (or Facebook, or Amazon, or Apple) can win.

End of 4/24/2015 prices of giants that could fall:

T: $34.01 (5.7% dividend yield)

VZ: $50.03 (4.5%)

S: $5.27 (0)

CMCSA: $59.64 (1.7%)

GOOG: $565.06 (0)

 

 

 

A Fun/Dangerous Hypothetical from David Swensen

Robert Shiller’s survey course on finance at Yale is available from both 2008 and 2011.  These lectures while sometimes basic for the experienced investor are chock full of gems and I should get around to putting my notes online.  Meanwhile one fun/dangerous note I feel like playing with from David Swensen’s guest lecture in the Spring of 2011:

I could take Yale’s $17 or $18 billion dollars and put it all in Google stock. If I did that, I’m not sure how long I’d keep my job. It might be fun for a while, but that would probably be damaging to my employment prospects. But if I did that, asset allocation would have almost nothing to say about Yale’s returns. It would be the idiosyncratic return associated with Google that would determine whether the endowment went up or down or stayed flat.

This comes from his elucidation to investment returns could come from stock selection but basically that is a very hard game.  Well, what if he HAD put $17 billion into GOOG on February 2, 2011 (assuming no market move from building in a Larry or Sergei-sized stake in GOOG)?

GOOG was $612 on Feb 2 2011 and $699 now; a 14.2% return just over 17 months.   Yale’s endowment report for 2011 (up to June 2011) had a 21% return that year (announced late September); but no fiscal 2012 results have been announced yet; will be fun to see and compare.

Chart forGoogle Inc. (GOOG)

 

Large Cap Tech LEAPS on August 31

The following is a list of the current base prices of AAPL, GOOG, MSFT and a few others for comparison including a possibly interesting play with HPQ as well followed by various January 2014 calls.

The mathematical dissection of which options have the best value compared to expected volatility I don’t think gives much of an incremental advantage in selection.  I’ve chosen for example 100 point increments in the strike prices of similarly priced GOOG and AAPL which demonstrates a bit more expected volatility in Apple than Google.

Apple, Google and Microsoft are in the very unusual situation of having immensely strong technological positions and insane amounts of cash.  Hewlett Packard anyone else with a scent of exposure to the PC market (DELL obviously) is also trading at historically low P/E ratios.  It is hard to imagine situations outside the more dire macroeconomic scenarios where both of these companies emerge as big losers (though a re-elected Obama administration that steps up taxation and doesn’t enable a repatriation of foreign cash holdings is sufficiently dire for them to wildly appreciate.)  The asymetric upside is good growth and increasing P/Es could lead to one or both doubling.

Of the three I would feel most comfortable with GOOG as a buy-and-forget play now which is of course an option.  Their market lock in feels strongest with the most innovative (most productive?  We’ll see) R&D and promising new fields to come.

One another play would simply be to get NASDAQ 100 calls.  The grossly undervalued large caps included the above named as well as CSCO and QCOM add up to approximately 50% of the index, though you get BIDU and WYNN and other plays that are not as salient to the thesis: do you feel lonely in the QQQ, Kraft Foods?   There are a number of companies in the index such as Amazon (3.5% of the index and IMHO grossly overvalued) The QQQ closed at 68.16 today; this idea train has already left the station this year but probably plenty of track ahead:

Chart for PowerShares QQQ (QQQ)

This looks a touch ahead of itself going into a volatile September; still, QQQ Jan 14 LEAPS now:

70 – 5.92

80 – 2.29

90 – 0.63

100 – 0.13

This strategy would have fallen short in companies like Microsoft and Oracle and others in the lost decade of stocks 2002-2012 but as the economy generally picks up and if Europe were to return from the brink would pay off big.  For my current positions short S&P if there is a steep downturn in September I would pull the trigger on a strategy such as this.

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