JCOM Punished Following Downgrade

JCOM was punished by the market today after being downgraded by Pacific Growth Equities at 1:00 pm, falling 16.6% to end the day at $33.57. (Prior to 1:00 pm the stock was up slightly.) The Reuters summary of the downgrade is as follows:

BANGALORE, March 29 (Reuters) - Pacific Growth Equities on Tuesday downgraded j2 Global Communications Inc. (JCOM.O: Quote, Profile, Research) to "equal weight" from "over weight," citing concerns that a tax on assigned telephone numbers might be introduced, hurting the company's profitability.

What is the commotion about? The government is currently looking for ways to generate more revenue for the Universal Service Fund, some of which could potentially affect JCOM's bottom line. (The Reuters article Universal Service Charges May Boost U.S. Phone Fees, published yesterday, provides the general story.)

Scott Jarus' (President) and Scott Turicchi's (CFO) take on these developments can be found here on the shareholder created JCOM website JCOMtalk.

An excerpt from this letter from top JCOM management (bold my own):

"We do not believe that such a tax will have a material financial impact on the future prospects of j2 Global. We will continue to monitor the progress of the USF funding alternatives and will lobby vigorously against any proposal that would impose a regressive tax on the consumers of our service and cause us to alter a portion of our business strategy. Again, please keep in mind, this is only one of only four proposals which may be considered by Congress, it has not yet been debated and it certainly has not been enacted."

My personal opinion of the situation:

I smell bs here on the part of PGE. Long-term holders of JCOM don't need to be reminded of the stock's history of manipulation, manipulation which occurred despite the company's outstanding performance and fundamentals. JCOM remains heavily shorted with a short interest of 4,161,805 as of mid-March 2005, comprising roughly 20% of the float.

My long-term outlook for JCOM remains the same. In my opinion this dip is an opportunity to double-down. We'll see where this company stands and how much money its short sellers have made in a few years.

Full disclosure: I am long JCOM.

Yahoo! to Boost Free Email Storage Capacity

Yahoo! announced today that it will boost the storage capacity of its free email service to 1 gigabyte, starting in Mid-April. This matches the storage capacity of Gmail, Google's free email service.

The Texas Hold'em Fad & Online Gambling

I don't understand this country's recent obsession with Texas Hold'em poker, and more generally, gambling. I hadn't even heard the phrase "Texas Hold'em" until a year and a half ago. Now, you see World Poker Tour (WPTE) poker tournaments all over ESPN, and every other show on the Travel Channel is about Las Vegas.

Part of this fad, of course, is online gambling. Online gambling is a great business, with low overhead, recurring cash flows, and easy scalability. I've owned stock in the two main publicly-traded online poker plays myself: Cryptologic (CRYP) and World Gaming (WGMGY.OB). I bought CRYP @ ~$21.00 and WGMGY.OB at $0.66 in late December. I sold both recently, after serious run-ups occurred in February. (I may repurchase CRYP in the future and I will probably not own WGMGY.OB ever again.)

I am still bullish about the overall long-term potential of most aspects of the online gambling business, but I have nagging doubts about these two gambling software companies, which don't actually run the online gambling sites themselves.

First, what does their pricing power look like in the long run? I suppose it depends on the extent to which customers are loyal to the website than to the software, but let's face, it isn't difficult to write gambling software and license it out. I would feel much more comfortable buying stock in a company that runs online gaming sites than one that provides software to them. (FYI, CasinoCity.com maintains a list of the largest suppliers of online gambling software here.)

Second, online poker (not online gambling -- just online poker) has one possibly fatal flaw: its anonymity. What if I and nine of my friends were to join a texas hold'em game and communicate by phone or instant messaging while the game is occurring? Knowing the cards held by the other nine would make the group almost unbeatable. You would have a money machine. Even if only two people were in on the scam, you would greatly improve your odds. (Online poker comprised 20% of CRYP's 2004 revenue.)

@Road (ARDI) Looks Interesting

I was perusing Forbes' list of the 25 Fastest Growing Tech Companies today (which is old news, it was released 2/14), and some of the stocks on the list seem like decent values right now. Particularly, @Road (ARDI), the top company on the list, looks like a good value at first glance. If anyone else is following this company I would be interested in hearing your thoughts.

The lowdown:

@Road provides IT services for mobile workers. Here is a short description of the services they provide at the IR section of their website.

Why this stock looks like an interesting investment:

The company has nominal liabilities and ~$118M of cash, amounting to ~$2.15 per share. At today's closing price of $4.33, giving it a market capitalization of ~$237M, the company has ~50% of its market capitalization in CASH.

Our enterprise value is ~$111M, or $2.03 per share. The company had $8.56M of FCF in 2004, amounting to an EV/FCF ratio of ~13. Most of this FCF is of a recurring nature. This, mind you, from one of the fastest growing tech companies out there, at least according to Forbes. The situation obviously seems compelling, but requires more due diligence.

Among the points I want to research more extensively:

+ @Road's stock price has been all over the place, and has a record of short manipulation. I don't yet if that happened for a company specific reason, or if things just got out of hand (it happens to the best of them, like JCOM).

+ Who are their customers, and how many are there? On the "Reuters Abridged summary," from Yahoo! Finance, During the year ended December 31, 2003, Verizon Communications represented 17% of the Company's total revenue.

The 10K was just released today, so I'm going to start there.

Again, comments about the company are welcome.

KONG Buying Opportunity

In my opinion, now is a good time to initiate a small position in KongZhong (KONG). The stock closed at $8.66 Friday, giving it an enterprise value of ~$200 M. I feel the stock may go down a bit further from here in order to fill the gap up that happened after Q4 earnings, but I would be suprised if it went below $8.00, barring any news.

With a TTM FCF of $13.6M, KONG is currently sporting a EV/TTM FCF multiple of ~14.75, and a TTM P/S multiple ~4. Not too bad.

And then there's KONG's growth. Q4 saw sequential revenue growth of 33% and YoY revenue growth of 329%, with sequential and YoY net income growth of 24% and 323%, respectively. Gross margin improved slightly to 65.8%, as compared to 65% for Q3. For more information, the KONG Q4 presentation can be found here, and the SEC filing here. The SEC filing includes management's 1Q05 business outlook.

By all accounts KONG is currently the number one mobile services provider in China. It stands to benefit (1) as the overall WVAS market size grows, (2) as the market consolidates, and (3) as customers migrate from 2G to 2.5G, from which ~93.5% of KONG's Q4 revenues came.

Of course, keep in mind the risks associated with KONG and the other WVAS companies.

Full disclosure: I am long KONG

The opinions expressed in this blog are my personal opinions. I am in no way responsible for trades made or not made because of something read here. One should always do his or her own due diligence before buying a stock.

Next Week: JOBS and TOMO Report Earnings

Earnings: 51Job (JOBS) reports earnings pre-market tomorrow 3/14, and Tom Online (TOMO) reports earnings pre-market Tuesday 3/15. Two in a row.

I don't know what to expect with JOBS, other than volatility. The traders will be out tomorrow. Either way, I think JOBS is a good longer-term play at this level. 51Job has the same general story as the WVAS stocks: it is a big fish in a rapidly growing, fragmented market, with a huge potential market size.

I personally expect TOMO to get a bump after earnings, as the stock's valuation is already so low, and I expect a WVAS stock rally if TOMO performs well.

Full disclosure: I am long JOBS and TOMO

eBay Launches Intl. Classified Ads Site

According to this article, eBay just launched an international classified ads site called Kijiji.com. ("Kijiji" means "village" in Swahili.) This, of course, comes off of the heels of eBay's purchase of a 25% stake in Craiglist.com last August.

If there is one good thing I can say about eBay it is that they recognize the value of community on the internet as a means of achieving user lock-in - the oft-referenced "network effect." eBay, PayPal, and Craigslist all currently enjoy de facto monopolies in their respective sectors due to this phenomenon.

Full disclosure: I do not own shares of eBay.

What Will Be Next From Google?

Yesterday Google announced that web users can now get current weather conditions and a forecast by typing, for example, [weather Chicago]. This is the latest Google feature released this year, the others being Google Maps, Google Movies, and Google Video.

So what other new services will we see from Google this year and beyond? I'm going to play the role of Nostradamus here and make some predictions:

1) Google Travel: I have no doubt in my mind that Google will release its own travel service, to the detriment of Expedia, Orbitz, and Travelocity. I envision a Google version of Kayak.com - a one-stop, search-based aggregator of flight, hotel, and car rental information. Like Froogle, Google Travel will directly link users to provider websites, allowing consumers to bypass the fees charged by the current leading travel websites.

2) G-Bay: I predict that Google will one day release a service which will allow one to search through auction postings from all of the various auction sites - eBay, Overstock Auctions, Amazon Auctions, Yahoo! Auctions, and so on - from one central site. A central order book, of sorts.

The implications of such a website would be far-reaching. Most importantly, it would weaken eBay's network effect, and hence weaken the de facto monopoly eBay has on the online auction business. This would open the door for new competition, thus reducing eBay's pricing power and lowering transaction costs for internet auction services across the board.

3) Google Jobs: I predict that Google will unveil a job search service at some point in the future. This service will make worldwide job listings searchable through one central site.

Ultimately, I believe that Google has the potential to weaken and even usurp the roles of many of the most successful internet websites because it can offer users (1) better accessibility to pertinent information, due to Google's core competency in search and knack for innovation and design, (2) at a lower cost, because Google cuts out the middle man by making its services entirely ad-supported.

Full disclosure: I do not own shares of Google.

Jefferies First Annual Internet Conference

Jefferies hosted their first annual internet conference today in NYC. Presenting were a host of mid-cap internet companies, including Monster (MNST), J2 Global Communications (JCOM), Bankrate (RATE), KongZhong (KONG), iVillage (IVIL), aQuantive (AQNT), ValueClick (VLCK), and Digital River (DRIV).

Archived audio of the event can be found here.

JCOM Touches $40

JCOM touched $40 today for the first time since late 2003, marking a new 52 week high for the stock. Congratulations to all JCOM longs.

The company presented at the Jefferies conference today. Access J2's presentation here.

Spotlight On Closed End Funds: ETO

If anyone here hasn't yet checked out ETF Connect, do yourself a favor and look around the site. It is a great resource for investors interested in closed-end funds and ETFs. I particularly find it interesting to look through its list of closed end funds ordered by discount for deals.

The extent to which many of these closed-end funds trade below their net asset value astounds me. For some funds it is understandable; many real estate and fixed income funds, for example, are trading at discounts greater than 10% due to the current interest rate environment. For other funds, however, it doesn't make much sense. (Not that I am angry about this phenomenon, of course!)

One such wrongly-discounted fund is the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund, which trades on the NYSE under the ticker symbol ETO. It is closed today at $21.47, a price that represents a roughly 12% discount to the fund's Net Asset Value. What is there to like about ETO apart from this hefty discount? First, it has an expense ratio of 1.06%, which is relatively low compared to similar funds. Second, it has a dividend yield somewhere in the neighborhood of 6%. Third, it has a global focus, with more than 50% of the fund invested internationally. Last, and most importantly, the fund has savvy management. Eaton Vance is one of a handful of fund companies that I respect.

ETO's quarterly portfolio holdings, just released on Monday, can be viewed here. ETO's largest positions are in banking, utilities, and energy. Additionally, the fund owns 150,000 shares of May Department Stores (MAY), which have done well in recent days, of course, after Federated announced it would purchase the company for nearly $11B.

Full disclosure: I am long ETO.

LTON Q4, Pure-Play Chinese WVAS Stocks

Linktone did very well in Q4, with sequential revenue growth of 17%. The stock popped 5% this morning. As I write it is trading at $7.37.

This stock, as well as the other Chinese WVAS stocks, trades at a low multiple because of uncertainties about (1) the power dynamic between China Mobile and Linktone, i.e. China Mobile's ability to fine and its ability to adjust the revenue sharing structure, and (2) taxation uncertainties. Also, to a lesser extent there is the concern of commoditization, though factors such as proprietary content and branding mitigate that.

Apart from all of this, it is clear that Linktone and KongZhong are trading at serious discounts to where they would be trading if they operated in the United States. So while it would not be prudent to own large positions in these stocks due to the aforementioned uncertainties, small positions make a lot of sense to me at these levels. As Peter Lynch wrote in Beating the Street, "Here's the key question to ask about a risky yet promising stock: if things go right, how much can I earn? What's the reward side of the equation?" Clearly, if the status quo persists for these stocks, the reward side of the equation is sizeable.

Full disclosure: I am long KONG as of mid January, and will initiate a position in LTON within the next week. I do not yet know know enough about HRAY to make an educated judgement.

As always, the opinions expressed above reflect my personal opinion. I am in no way responsible for any trades made or not made because of something read here.