Wii are Headed to China and S. Korea

On Friday, the New York Times reported “Nintendo Co Ltd said it aims to launch its Wii game console in China and South Korea next year, helping accelerate its break-neck growth and cement its recent lead over Sony Corp and Microsoft Corp.” This news should send shares of Nintendo (OTC: NTDOY) much higher as analysts readjust their models to include two huge market opportunities in China and South Korea.

In related news, in this week’s TIME magazine story about China’s Me Generation (teens to thirties), a rising middle class twenty something declared he would rather have a Nintendo Wii than democracy. Need I say more?

As I noted in my coverage of Nintendo’s earnings report this week at SmartGuyStocks, NTDOY is on a roll and shares are poised to keep climbing as global investors start snapping up shares as quickly as the Wii and DS.

Disclosure: SmartGuyDH is long NTDOY

Nintendo Update: Wii still sold-out

Nintendo (OTC: NTDOY.PK) net profit powered-up 143% yoy and sales boomed 135% yoy as Wii demand continues to outstrip supply and the handheld DS becomes ubiquitous. As I noted when first recommending NTDOY at SmartGuyStocks in June, the Wii is a revolutionary development in the gaming world that is doing what PS3 and Xbox360 will never do: going mainstream.

Goldman Sachs recently initiated coverage on NTDOY with a “Buy” rating. Besides the fact that Goldman (and most white shoe investment bankers) are late to the game, they bring a new wave of institutional and wealthy investors to the table. Seems like demand for shares of NTDOY may start following demand for the white-hot Wii and DS.

Although both Sony (NYSE: SNE) and Microsoft (Nasdaq: MSFT) have lowered prices for their consoles, the Wii and its games are still significantly cheaper. I was in Best Buy (NYSE: BBY) last weekend chatting with parents and teens in the video game aisles, and price conscious parents are much happier with the cheaper Wii console and Wii games. Parents know that the console is merely the first of many dollars sunk into interactive entertainment … games are constantly on every console owner’s “I Need” list. I also noticed that many people are happy that the third edition of Activision’s (Nasdaq: ATVI) pop hit Guitar Hero is available on the Wii.

People who want the stock to pull back so they can get in cheaper continue to focus on the undersupply of Wii’s. However, I do not have much of an issue knowing that NTDOY cannot even produce enough Wii’s to make the world happy. To me, that means sales will stay strong and grow gangbusters until at least the same time next year. Ho, ho, ho …

Disclosure: SmartGuyDH is long NTDOY

Apple: Savior to Sinner

At the turn of the millennium, file sharing sent the music industry down for the count with an unforeseen brick-fist upper cut to the chin. The dizzied heavy weight champion regained consciousness by the one or two count, but the extremely unfamiliar state of affairs coupled with a primal fear of impending doom caused record industry executives to reach for a miracle. While the industry was on its knees, a glorious radiating image of a savior emerged from the trainer’s corner: Steve Jobs.

Jobs stepped in at the perfect moment. Record labels were stunned, incompetent, and as vulnerable as a terminally ill patient in a room full of “cure” salesmen. I imagine Jobs said something like, “I can stop the bleeding. I can help you up. If you work with me on my new iTunes platform, you will win this bout against those file sharing thieves.”

Many meetings and legal accounts payable later, Apple’s (Nasdaq: AAPL) iTunes began plugging the massive deep wounds and restoring revenue back to record companies. Fast forward to 2006. Record companies are back on their feet and can see the transition to digital may not be fatal after all. In fact, a bit of hubris has returned to the huge corner offices of the major labels. Like any great narcissist, record executives are ready to ditch their savior and fight according to a new plan.

The first step in ditching the successful trainer Jobs has been a strong branding campaign to redefine Jobs from savior to sinner. Press popping up like switch grass has refocused the record industry’s fight from file sharing thieves to the extortionist distributor named iTunes. Leading the campaign is Universal Music chief Doug Morris. The former born-again follower of everything Jobs is now rounding up the other major labels (which control 75% of the music owned in the US) to launch a record company owned subscription platform that will bake the cost of music into the price of hardware or cellphone fees. Sounds like the industry’s incompetent execs are following tradition by simply moving from a Job’s envisioned world to one prophesized by music production guru Rick Rubin (who several months ago explained this exact label-owned platform in an interview with the New York Times).

This new platform, Total Music, is actually the first viable alternative to the ubiquitous iTunes. We finally have someone who understands that making music “free” (i.e., my music player or cellphone allows me to download unlimited music from Total Music at no additional cost) to the consumer is tempting even to the most loyal Apple fans. In fact, the idea is so sound that for the first time in 5 years I am moving from AAPL mega-bull to fence-sitter.

If Total Music gains a reasonable percentage of digital market share, AAPL will be forced to either take lower distribution fees or possibly lose content completely. Both these outcomes will significantly reduce Apple’s revenue from music distribution. Thus, shares could suffer some multiple contraction as analysts begin readjusting models to reflect less favorable distribution margins.

We have a while to see how this play out. Total Music is not a tangible product yet. As my previous article at SmartGuyStocks pointed out, record companies are also heavily distracted by marquee defections such as Radiohead and Madonna. However, if the same type of sinful greed that injured the record labels spreads too far into the savior’s camp, AAPL may soon lose its Don King like monopoly in the music business.

Disclosure: SmartGuyDH does not own shares of AAPL

Google: Grandpa’s Classic Pure Growth Continues

Over an hour ago, Google (Nasdaq: GOOG) announced another quarter of blowout earnings. The internet giant reported Non-Gaap EPS of $3.91 versus analyst expectations of $3.78 and a whisper number of $3.82. On a reported basis, Google earned $1.07 billion for the quarter, up 46% from the year-ago $733 million. Gross revenue rose 57% from a year ago to $4.23 billion.

These numbers are proof that GOOG still holds a New England Patriot like dominance on the internet search and advertising playing field. I listened to the entire conference call and liked what I heard. Rather than postmortem the entire quarter, I want to focus on a few major points that elude other journalists who seem to still have sour grapes as I noted in my previous coverage of GOOG at SmartGuyStocks.

First, executives acknowledged that they have and will continue to aggressively monitor head count. “Going forward, you should be comfortable,” CEO Eric Schmidt responded to an analyst question regarding worrisome hiring growth. Thus, when MarketWatch comments that “Google keeps thumbing its nose at the Street,” you have to wonder whether the journalists listen to the entire conference call before prematurely unloading garbage to grab a place in line on YahooFinance.

The MarketWatch article states Google is a renegade elitist that simply refuses to listen to Wall Street or investors. I don’t know about you, but I have a feeling GOOG investors are happy with their return. Further, if more companies followed Wall Street management advice, we’d have a ton more Enron and subprime mortgage explosions in the business world. So, I applaud Google’s effort to think long term. Seriously, doesn’t MarketWatch have editors?

Another horrible article, posted at the Wall Street Journal Online, suggests GOOG will be volatile because the company did not heed the infinite wisdom of some overworked dim-wit analyst at Needham & Co. who called for a stock split. This office pet must be working way over 100 hours a week because he even said splitting the stock will reduce trading volatility and increase institutional ownership. Actually, if the stock splits as recommended (4 for 1), volatility will increase because college students and bored employees will begin day trading GOOG for extra cash while in class or wasting time at work. Moreover, I recently read the Fidelity Mutual Fund guide and noticed heavy institutional ownership of GOOG. So, another crappy article that seems to have slipped by vigilant editors at respected financial websites.

My grandfather once gave me his lifelong secret investing advice: buy the best growth companies of your time and your portfolio will grow nicely. Regardless of what inferior journalists write about Google, the numbers speak for themselves. So long as the company executes in mobile, video, and internationally, I will follow my grandfather’s advice and watch this one grow for the foreseeable future.

Disclosure: SmartGuyDH is long GOOG

Warner Music Group to Get Bad Case of Radiohead

This morning I received an email with a special code to download the highly anticipated new album from the world’s most popular band: Radiohead. What makes this download different from any other? For the first time in history, I legally paid whatever I felt the album was worth.

Unlike the illegal free download black market that has sparked defensive action such as lawsuits and technological security, Radiohead’s ‘pay-what-you-will’ is a revolutionary move with no conceivable prophylactic to prevent record labels from suffering a fatal epidemic. As the best talent slowly moves to self-employment, industry goliaths like Warner Music Group (NYSE: WMG), EMI, Sony-BMG (NYSE: SNE), and Vivendi (EPA: VIV) will watch their blue chip products disappear from the balance sheet. If the labels are to convince the best musicians in the world to stay, labels will surely have to negotiate less favorable deals. Not a sweet song for company revenues and margins.

Industry insiders are predicting yet another nuclear attack on the traditional recording industry. Time.com gathered some interesting insights:

“This feels like yet another death knell,” emailed an A&R executive at a major European label. “If the best band in the world doesn’t want a part of us, I’m not sure what’s left for this business.” “Radiohead is the best band in the world; if you can pay whatever you want for music by the best band in the world, why would you pay $13 dollars or $.99 cents for music by somebody less talented? Once you open that door and start giving music away legally, I’m not sure there’s any going back.”

I don’t recommend shorting WMG because it has already fallen almost 60% in 52 weeks, and this is a long term play that would require enough capital to weather any short term pops. But if you have the cash and a ton of patience (e.g., institutional investor), you may want to start shorting this dying elephant as its remaining three legs start to give way.

Kimberly-Clark: Betting Against Another Rate Cut

Consumer staples giant Kimberly-Clark Corporation (NYSE: KMB) announced price increases that further signal inflation spreading from energy and raw materials into core household goods. Prices will rise 4-7% for necessities including toilet paper, diapers, and paper towels. Consequently, either retailers will shrink margins or consumers will watch more key budget items soak up discretionary income.

Since I do not anticipate a national outbreak of perpetual constipation, both prospective outcomes are negative for economic growth. In addition, such inflation will heavily challenge another Fed rate cut. This is another reason to park your hard earned dollars where the money has no choice but to flow: with companies that earn revenue from waste and energy operations like SmartGuyStocks pick Covanta Holding Corporation (NYSE: CVA).

Covanta’s Irish Eyes are Smiling

During September, Covanta Holding Corporation (NYSE: CVA) has been pulling the tap in Irish hotspots in both the Old and New World. Earlier in the month, the company announced a new waste-to-energy venture in the white-hot Dublin market. The deal has three core drivers for SmartGuyStocks pick CVA:

1)    Responsibility for the design and construction of the project, which is estimated to cost approximately 300 million Euros and require 36 months to complete;
2)    Operation and maintenance of the facility for the project, which has a 25-year “tip fee” type contract with the Dublin City Council to provide disposal service for approximately 320,000 metric tons of waste annually; and,
3)    Sales of electricity into the local grid under short-term arrangements.

I love this deal for two reasons: Covanta is executing during a bull market for waste-to-energy and payment in Euros is another way to benefit from the falling dollar. This project should also help Covanta to continue garnering more clients in the lucrative European market.

Back on US soil, Covanta gobbled up smaller waste services company EnergyAnswers for $61 million in cash and assumed debt. The acquired assets include energy-from-waste facilities in Springfield and Pittsfield, Mass., a landfill operation, two transfer stations, a waste transportation and small collections business, and a wood and yard waste recycling operation. The new assets add strength to CVA’s portfolio and continue to increase economies of scale in the high cash flow waste services industry.

Both new deals confirm CVA’s ability to execute in the opportune environment I discussed in my previous article - and this is only the top of the mornin’.

Disclosure: SmartGuyDH is long CVA

Sour Grapes: Snobs say Google losing indie sex appeal

An interesting phenomenon exists in the music industry. When an excellent new band forms and starts hitting the small venue scene, a certain crowd of independent music enthusiasts adopts the band as a new obsession. These fans pride themselves on knowing and supporting talent that remains unknown to the masses. They wear the rare t-shirts and talk about the band members as if they have been the best of friends since conception. Consequently, these fans self-righteously believe they are “cool” and “truly” know about cutting-edge new music, while the rest of us are brain dead squares who only know what the media power elite shovel into our ear holes. 

A similar phenomenon is unfolding with Google (Nasdaq: GOOG). Google was a classic garage startup (band?) founded by two engineers from Stanford. Tech geeks and college students quickly became groupies of Google’s golden search algorithm. Those who used Google were the Web’s avant garde, and those who did not were the brain dead squares who browsed the godhead of information through Microsoft’s (Nasdaq: MSFT) MSN, TimeWarners’s (NYSE: TWX) AOL, Yahoo! (Nasdaq: YHOO), or any other search engine your parents (or grandparents - gasp!) were using. Google.com was the feng shui zen bikini model, all others were content-cluttered faces with pimply banner ads and barely noticeable search bars.

At first, indie fans used the word ‘Google’ as sexy slang for searching the web. “Google like this … Google like that … Google with a baseball bat.” However, like Kleenex and Xerox, Google soon became synonymous with its product. More and more unhip adults began saying “Oh Mel, just Google your meds for a Canadian website that sells at a discount,” and “I Googled that video game and you cannot play because it has foul language.”

Once the uninitiated start liking your secret indie band or search engine, it’s time to wage a major PR campaign to smear the “evil corporate sellout.” I’m not a shrink, but it seems that when persons create part of their identity around something they perceive as special and unique, those persons quickly abolish any association as soon as their beloved identifier becomes commonplace - and Google is no exception.

Last week’s The Economist featured two commentaries (disguised as articles) throwing some very large stones at the great evil sinner: Google. In short, the articles raise a host of hypothetical issues that could bring Google to its knees. They pull out all the stops including Orwellian foreshadowing, interviews with disgruntled ex-employees, and overwhelming attention to expansion into lower margin revenue streams.

I don’t know about you, but the last time I checked, Warren Buffett recommended companies that are as close to monopolies as possible, with excellent returns on investment, high rates of growth, and powerful brand names. If you ignore all the fear mongering in The Economist, you would have a nice set of facts that meet Buffett’s framework. I believe this is a sign that we have officially entered the phase where emotional sour grapes will interfere with objective financial analysis of Google. As a result, buying opportunities will arise as negative propaganda affects GOOG.

Does Google face all the classic characteristics of a maturing company? Yes. Will growth slow as the size of the business grows? Yes. Does this make them any less able to make excellent acquisitions, invent new successful products, or continue to dominate one of the most profitable businesses in human history? No. Will Google stay on top forever? Probably not. However, things are still working well and the company continues to mint money. I recommend keeping it on your watch list.

So, don’t let the whining cool kids make you feel insecure about GOOG. The best thing a company (and investor) can hope for is its products to reach the masses and become “uncool” to the infinitesimal indie crowd. Thus, the indie kids can turn us on to the next big thing, but unless that thing goes mainstream, it remains psychological fanfare for the few and a very poor investment for the many.    

Gamers Won’t Stop: Bullish Growth in Video Games Continues

Last week the only pure play video game retailer GameStop Corp. (NYSE: GME) reported excellent earnings. In short, net profit increased 650% yoy to $21.8 million ($0.13/share) and beat estimates by $.04/share. Revenue was $1.34 billion, 12.6% higher than average analyst estimates of $1.19 billion. Same store sales increased 29%. GameStop also raised full-year guidance to between $1.45 and $1.48 (up from $1.42 to $1.46).

I am writing about GameStop because it is a bellwether for the video game industry. When the bells start ringing like they are, we know the flock will start following the leader. However, not all video game stocks are as sure a bet as the overall growth of the industry. In order to best understand the landscape and place some winning bets, we must first look at each component of the video game industry.

Console Manufacturers: A console is a device that reads a game and translates it to a usable experience (much like a hard drive for a computer). Three companies currently manufacture consoles: Nintendo (OTC: NTDOY.PK), Microsoft (NasdaqGS: MSFT), and Sony (NYSE: SNE). Of the three, only NTDOY has the ability to meaningfully reflect console sales in the share price. The other two are some of the largest companies on the face of the Earth, and an investment in them is an investment in more goods and services than I care to follow.

Video Game Publishers: Video game publishers make the games. The most visible publishers are Activision (NasdaqGS: ATVI), Electronic Arts (NasdaqGS: ERTS), THQ (NasdaqGS: THQI), Take Two (NasdaqGS: TTWO), Atari (NasdaqGM: ATAR), and Majesco (NasdaqCM: COOL). First, let me toss the garbage into the discard pile. If you are interested in gambling and throwing your money on the longest shots at a race track, here are a couple to waste time with: COOL and ATAR.

COOL is one of the worst run companies I have ever followed. This company is why Warren Buffet recommends, “It’s better to own a significant portion of the Hope diamond than 100 percent of a rhinestone.” The company has a lot of nepotism scattered through its ranks, and these people have less than a handful of brain cells between them. The company has been wrought with problems for years, and the climax was two years ago when the company’s then CEO Carl Yankowski pre-announced excellent earnings a few weeks before stunning shareholders with a massive miss (in laymen’s terms we call that “lying” and “misrepresentation”). If you bought a few months ago you could’ve made 50% on your money – but that’s only worth it if you enjoy staying awake at night wondering if the company will exist tomorrow.

ATAR is another fallen star. After years of nothing, this once famous company staged a major branding campaign to get back in the game. However, the company is poorly managed, its games are subpar, and if you invested, you would’ve watched shares nosedive from $60 to less than $2. Another piece of garbage for the renewable energy industry.

The next tier – one step from garbage – has only one member: TTWO. The company has been bought by a private equity fund that seems to be doing all the right things: slashing jobs, streamlining spending, and basically restructuring the entire company. TTWO has some excellent assets, franchises (including the famous Grand Theft Auto), and a nice balance sheet; however, the company has a long history of corrupt executives that cheat shareholders. The company recently announced a new game BioShock that is receiving top kudos from gaming experts and magazines, but some say it is too complicated to sell strong beyond the extreme gamer audience (i.e., the mainstream may not buy in). If you have the time to watch this stock like a pedophile at a kindergarten orientation, then you may be able to squeeze out some nice returns – otherwise, you may be better off upping your ante on your NFL Fantasy Football pool.

Stay tuned for my next installment where will I cover the best of breed game makers and continue to show why GME and NTDOY are currently the best bets in the video game industry.

Disclosure: SmartGuyDH is long NTDOY.PK

lululemon: Hot IPO or Market Opportunists?

lululemon (Nasdaq: LULU) is a fast growing designer and retailer of athletic apparel in North America. The hot brand is well known for their women’s yoga apparel. The company was founded in 1998 in Canada, and expanded to the US in 2002. Currently, lululemon operates 52 stores.Financial performance is nothing less than impressive:

Our net revenue has increased from $40.7 million in fiscal 2004 to $148.9 million in fiscal 2006, representing a 91.1% compound annual growth rate. During fiscal 2006, our comparable store sales increased 25% and we reported income from operations of $16.2 million, which included a one-time $7.2 million litigation settlement charge. Over that same period, our stores opened at least one year averaged sales of approximately $1,400 per square foot, which we believe is among the best in the apparel retail sector. (Lululemon Corp. Form S-1.)

So, investors must be lining up to balance their investment-life portfolio with shares of LULU? Not so fast. Last Friday the company filed a revised prospectus to cut the number of IPO shares by nearly ten percent to 16.4 million. If demand is the key reason to get in early on an IPO, we may want to wait and see before clicking ‘buy’ in our online brokerage account.

In my opinion, the disappointing appetite for LULU stems from the use of proceeds from the IPO. Although I love nearly everything about this company (e.g., strong management, solid financials, excellent brand value, tremendous growth potential), like Warner Music Group (NYSE: WMG), the people benefiting most from this IPO are the founder and private equity investors: existing lululemon shareholders will account for nearly 14.1 million of the 16.4 million IPO shares. Yep. That means, as the Form S-1 so eloquently reads, “We expect to receive net proceeds from this offering of approximately $20.3 million.” That’s out of approximately $164M raised.

Wall Street may not be predictable all the time, but one thing most investors frown upon is market opportunists. Some companies like Blackstone (NYSE: BX) have the PR and hype to get over this issue, but little known niche companies do not. Such behavior is unfavorable because LULU will now use more money from cash flow, rather than IPO proceeds, to fund growth. This, in turn, eats into value metrics that support stock prices as well as premium values that a prospective buyout player may be willing to pay. In this case, during 2007-08, lululemon has budgeted $28.0 million to $34.0 million for new store openings. Tack on working capital and expanding G&A, and the proceeds from the IPO seem more like a windfall for existing shareholders than future shareholders.

Will LULU become another must have apparel stock like Abercrombie & Fitch (NYSE: ANF), Aeropastal (NYSE: ARO), American Eagle Outfitters (NYSE: AEO), and Urban Outfitters (Nasdaq: URBN)? Or, will the company’s founder and private equity investors take all the icing off the cake? As I wrote in my article about the EDA IPO, we will stay tuned …

Disclosure: SmartGuyDH does not own shares in any of the companies listed above.