2015 – Themes and Forecast

2014 2015 imageWith 2014 in the books it is time to take a look at 2015 and see if we can match or exceed last year’s results. Let’s start with the M&A picture for 2015, which should continue to be strong as long as interest rates stay low. The tricky part now is that the valuations have continued to rise in this cycle and there are fewer undervalued names from which to choose so companies likely to be acquired but trading near their highs such as CoreSite and Inphi are not listed.

To further complicate things we have the fragile world economy, oil dropping 50%+ in a few months which impacts more than most people think and then add in copper prices at 5 year lows and it smells like deflation. With that in mind, we could be in for a very tough year. The M&A picks for 2015 include a few very solid companies as well as a couple of much more speculative turnarounds.

Aviat Networks – AVNW – Speculative niche wireless player and small market cap could make them an interesting play. Turnaround appears to be happening so it makes them much more interesting.

Lumos Networks – LMOS – Lumos has been unloved for some years now but is sitting on some great assets and appears to have a very motivated management team. The company can do fine as a standalone but with all of the fiber consolidation going on it seems like they would be a great fit for a number of larger providers. Like this one a lot especially on any pullbacks.

Nokia – NOK – Turnaround underway and a number of their competitors look like they may have topped out. I also like their investment and research around haptic technologies. While it would have been much cheaper to buy them two years ago it is possible a big player will still look to merge or acquire them.

Maxwell Technologies – MXWL – Growth has stalled but the market for ultracapacitors appears to still have major growth prospects. Could be a great tuck-in for someone.

Nuance Communications – NUAN – Repeat from last year but the story stays the same. Move to recurring revenue should have been largely digested. Tremendous underperformance with the CEO on the hot seat. The pressure will be even greater on the company to get it together or get the company sold.

RadiSys – RSYS – Beaten down but appears to be turning the corner. Small market cap could make this easy to digest for a number of players.

Twitter – TWTR – Talk about a company not living up to its potential. Management is basically loathed by almost everyone. Still someone ought to be able to better leverage Twitter. Maybe this year someone will. At a minimum how about a new management team?

Now onto the forecast for trends, technologies and products.

1 – Shadow IT – specifically the consumption of cloud services without any oversight – continues to grow putting many companies at risk – will put heat on the C-Suite and IT to do something constructive about the issue.

2 – AR/VR Hype turns to Reality – Augmented and Virtual Reality have yet to do much for the masses. Though I am down on Google Glass I am very excited about this space. With Oculus being bought for $2Billion, Facebook definitely thinks the space is worth having a seat at the table. Low cost, high bang-for-your-buck products such as MergeVR could entertain the masses – your kid could be asking you to buy one of these in the near future. Higher cost products from Samsung and Oculus will help provide the marketing dollars to get this category noticed, but it is still way too early to pick a winner. Question is who can deliver in mass with a killer app in 2015?

3 – Security Issues – Internet of Things will have a host of new issues to deal with, as hackers look to exploit some of the early roll-outs. Wearables will become the next frontier for BYOD that a number of vertical industries will have to grapple with in order to leverage staff productivity. Yet another area of data privacy and security issues to deal with.

4 – Mobility continues to push cloud adoption – Companies already have incorporated push mobile devices in mass, but what type of ROI are they getting? Can they prove it? With newly designed cloud applications available, recognizing the benefits of mobility and quantifying them is becoming much easier.

5 – Xiaomi – Haven’t heard of them yet? You will as they have a huge war chest to try and invade the West. Look for them to try and exert their muscle on the mobility front as they are skilled copyists just like Samsung a couple of years ago. Sound far-fetched? Consider just 4 years ago this company wasn’t even on the map and now they are #1 in China. Here is the crazy part – they run Android but have made their phone look and behave more like an iPhone than Samsung has ever come close to doing.

6 – Skill shortage continues – The world economies will likely continue to face a number of issues keeping the labor market soft but key skills are in high demand. Just try hiring a Senior Big Data Analyst or a Chief Marketing Technologist. Many other highly skilled positions will continue to be in high demand with many slots going unfilled for more than 12 months.

7- Samsung Out of Steam – Samsung helped lead the Android revolution as they have been great at copying features from everyone else and delivering a quality product. Given that they lost market share this year they will need to come up with something new. Can they finally innovate? I am doubtful and feel they have likely hit a wall. This is part of the reason I think Nokia and others have a chance to rebound this year.

8- Wearables – 2015 appears so far to be more of the same. Lots of products coming out including quite a bit of cool technology. Problem is that many of these lead to gadget fatigue. It is still really hard to leverage all of the data. Many products miss key features and to get everything you want, you would have to wear 10 products at once. Even then the overall benefits are minimal. Until someone really figures this out we won’t be able to see how disruptive this category could really be. Could Apple have the answer?

9 – Startups – Look for a couple of things this year. Money should flow into a range of security related companies, as well-known breaches continue to make headlines throughout the year. Also, look for more specialization around verticals. Many companies will be created to attack vertical industries and continue to disrupt them. Previously, potential customers for these products were stuck developing their own code or having to purchase a major vendor’s product before spending millions to customize it to their needs. This will keep many of the big players on their toes and potentially looking for acquisition targets.

10 – Apple – You know I can’t leave this company alone. OK here is it. Apple Watch is a hard sell. So far I have seen no compelling applications to make me want to buy one – at least not yet. Factor in the faithful and they will probably still sell 7-10m of them in 2015. Question is can this product get legs and really redefine a category? Will this product release define the post-Jobs era? For now prepare for disappointment. On to other things – how about an overhaul of the Mac Air and finally a new Apple TV. The watch better not be the only new thing Apple is banking on to start building momentum beyond 2015. Only caveat – show me a killer app and I might change my mind.

I hope you enjoyed this year’s forecast. What did I miss? What do you see happening big in 2015?

Disclosure – Position in LMOS and NUAN

Report Card – 2014 Themes and Forecast

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Time to take a look back at the 2014 Forecast and Predictions and see how they turned out. Overall 2014 had a number of hits along with some disappointments. Let’s start with a review of the companies that seemed like they could be M&A Targets along with one to sell and see how they did.

 

2014 Picks with Performance Data
Acquired Closing Price 1/6/2014 Last Trade 12/31/2014 Percentage of Change
Blackberry BBRY No 8.01 10.98 37.08%
Fortinet FTNT No 19.24 30.66 59.36%
Game Stop* GME No 48.17 33.8 29.83%
Multi-Fineline MFLX No 13.97 11.23 -19.61%
Nuance NUAN No 15.05 14.27 -5.18%
Rackspace RAX No 36.73 46.81 27.44%
Average Gain 21.49%
*- Recommended selling or could have gone short

Highlights of 2014 – On the Money

Amazon finally getting enough criticism to cause some customers and analysts concern around a number of their strategies.

Avoiding social media stocks such as Yelp, Twitter, LinkedIn, Facebook along with Amazon which had negative comments in the forecast would have served you well as a number of them were down sharply for the year and the basket would have left you with a loss even with an amazing performance from Facebook.

-The overall portfolio did well against market averages and easily beat them with a 21.49% gain for the year.

Microsoft was a tough call as they are still struggling with handset sales but they seem to have found a winner with the Surface.

IoT was on target with a ton of interest and devices being introduced. A number of vendors are jumping in to figure out how to pull all of this data together and make it more useful.

Google Glass was welcomed to a lukewarm reception. No “killer app” and high price were just a couple of reasons why the units are not flying off shelves.

Outsourcers and Integrators Disappearing seems to be gaining momentum as a wide range of businesses were either bought, merged or closed up shop in 2014. Many researchers are hot on this trend now.

Lowlights of 2014 – Off the Mark though perhaps some just delayed

None of the M&A stocks were acquired though there was some notable interest around at least one of the candidates.

Digital wallet while getting some traction still isn’t widely accepted enough to ditch carrying credit cards and alternate payment methods. Maybe next year especially with Apple’s visibility helping.

3D Printing crimes and legal issues were not major issues in 2014

Apple did not ship a TV or a wearable though one was announced this year.

What could happen in 2015? Check out my next post coming out shortly and let me know if you agree or think I am missing something?

2014 Themes and Forecast

Last year’s “2013 Themes and Forecast” were on the money. It almost scares me to pick any M&A or rebound targets this year with the market having run up to a high point, and with the Fed claiming that tightening is coming. ‘Puts me in the nervous camp, but let’s go ahead and get started on some predictions for 2014.

Nuance – Is clearly a leader in voice recognition. You would think with the explosion of Siri and other voice-related systems this stock would be on fire. Unfortunately, the company has made a number of blunders and is in the midst of changing their business to a recurring subscription model which will further impact earnings. With a number activists pressuring the company to get their act together, and Icahn buying more shares at depressed prices, I like the risk/reward that the company gets it together or gets taken out.

Rackspace – Is a leader in cloud computing. However the company has been bashed due to reports of Amazon price cutting, execution errors, missing features, slower growth than many expected and their big bet on the OpenStack ecosystem. Rackspace also has one of the poorest partner programs in the industry which sends droves of opportunities to a number of their competitors. So what’s to like? Long-term, OpenStack has some prospects and the stock got a boost from the recent RedHat announcement of it being a big growth driver. With the stock down well over 50% from its high earlier this year, the valuation is much more appealing and there is pressure mounting on management to get it right. I see this company becoming part of a bigger organization in the long run.

Fortinet – Stays on this year’s list as I still think the installed base and valuation is appealing. There’s still too much overlap in this space which makes it ripe for consolidation.

Multi-Fineline Electronix The company has an X in its name so you know I like it already. MFLX is another one of these turnaround stocks as it trades below book and has been hammered due to bad news. With much of this linked to Apple and Blackberry, the company has worked hard to reposition itself for a rebound or possible acquisition. One kicker with Apple poised to launch new products is that they could potentially benefit from any new announcements.

Game Stop – Is one stock to sell. Of all stocks in the market today, I’m not sure any scare me as much as Game Stop, though it has rebounded like crazy from the XBOX news that they would stop allowing games to be resold. Long-term, games will be distributed digitally. Software is where the margin is, so I just don’t see how Game Stop will be able to reinvent itself. It seems they will suffer much the way Blockbuster did, yet the stock is near all-time highs. I hope they prove me wrong as I’ve enjoyed perusing their stores for many years.

Blackberry – I still believe these guys may get taken out or that the company will be split into a couple pieces. There are some great assets in the company but they need to move quickly.

In general I expect more consolidation in the cloud space. I am also worried about social media stock valuations as they are once again beginning to concern me. Twitter, Yelp, Facebook, LinkedIn and others are beginning to look quite expensive as we begin the new year.

Now on to the non-stock specific outlook.

Leather Wallet Goes Away, Almost – After years of battling technologies, it appears Bluetooth has begun to chip away at the payments space. If this happens, we could reach a point where we need to carry little more than a phone. There are a number of winners and losers if this comes to pass.

Microsoft Mobility – As smart devices are linked to the cloud, they are one of the easiest devices to replace. This actually works to Microsoft’s benefit as they eat into Samsung and Apple sales ever so slightly. The big question over the next couple years is whether Microsoft’s enterprise offerings are strong enough to drive sales of their mobility products that offer full integration. This will largely depend on the focus of Microsoft’s new CEO.

Amazon – Finally faces backlash as a number of companies finally wake up to the realization of the great threat Amazon poses to their ongoing survival. The list of companies at risk of extinction or severe retrenchment due to Amazon’s competitive positioning is so large that Wall Street is putting up with Bezos’ spending and results because the endgame is so huge. This is a fact that Rackspace and the OpenStack movement must capitalize on before it’s too late.

IoT – Becomes more seamless. Connecting all of the wearables and appliances in the world may be cool, but if they require separate apps, charging, maintenance, logins, portals—and the list goes on—they will be more cumbersome than they’re worth. Single collection and coordination of this information becomes critical for many of these technologies to achieve mass adoption. Manufacturers must get this right or risk burnout.

Breaches on Mobile Devices – Become more common, forcing companies into modifying BYOD requirements and enforcing MDM.

Outsourcers and Integrators Disappear – Most of this will be driven by two factors. Companies that haven’t invested enough to compete on their own will be acquired for their customer bases or will go out of business. Companies that are growing, offer unique value adds, and are versed in new technologies and business models will be acquired by companies attempting to catch up or solidify their positions.

Encryption – Finally goes mainstream. Let me sum it up in two words: Snowden and China.

Google Glass – Was finally released to a lukewarm reception. I saw someone with a pair on the other day and I can’t see someone wearing these on a daily basis. There just isn’t a killer app today for the general population as there are too many flaws. Perhaps down the road this will change. Anyone remember the Newton? Sometimes you’re just a little too ahead of your time. I can see vertical usage with the device for mechanics, travelers and other specialized fields.

Smarter Software and Machines Everywhere – IBM now claims they can identify your personality by reading as few as 200 of your tweets. Technologies to analyze every bit of data created are exploding, and we are just seeing the tip of the iceberg.

3D Printing – Creates an entire new economy. Over time, the technology will decimate old business models while generating new ones. People are just figuring out how to use these tools, so ethical implications and the potential for infringement will be high. If you thought theft of online music and movies was a problem, wait ‘til you see how criminals leverage 3D printing.

Apple – I’ve been wrong on Apple the past couple years so what do I know. I do think Apple still has some tricks up its sleeve. This has to be the year they come with a wearable and/or a TV (or should I say home entertainment system?). Expectations will be incredibly high due to the delayed shipment of these products. Apple has no margin for error—they will have to be measurably better than what is on the market today or they’ll have to define a new category. My guess is that they get at least one of these right.

Disclosure – I am currently long Rackspace and Nuance.