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| http://www.gilder.com/ | Issue 294.0/May 11,
2007
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HEADLINES:
- The
Week / Should You Power Up or Power Down?
- Friday
Feature / The Black Swan
- Friday Blogger Bonus / Wal-Mart or Malpass?
- Readings /
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The
Week /
Should You Power Up or Power Down?
Charlie Burger, Gilder Telecosm Forum (5/9/07): Could more go wrong with a company during a single quarter
than went wrong with Power-One (PWER) last winter? Sales to key North
American customers fell near the end of the period, signaling the start of an
inventory correction. Also falling more rapidly were prices of Power’s
traditional products, such as ac-to-dc converters or “bricks,” as competition
heats up. More stable are the prices of the newly acquired custom lines from
Magnetek, but the benefits were more than offset by lower gross margins and
hefty integration costs. Meanwhile, Power lost control of its motor controls
business, which was wracked by abnormally high expediting costs (the
significance of which somehow escaped “local” management). Climbing also were
legal expenses in the Z-One patent infringement suit against Artesyn.
With all of these problems, its no surprise that gross margin exhausted
itself at 19% on its attempted climb toward the forecast mid- to high 20s. Now
we are told it may take another year to reach those margins. The sole reason
we’ve suffered along with this company for years is the chance to profit from
its decisive lead in digital-power technology. Though Power continued to book
Z-One wins in the quarter, with the mix still going increasingly toward
higher-volume tier-1 customers, management now tells us that the adoption rate
of Z-One “has been stymied” by the Artesyn suit, and they will no longer
quantify new wins. This reawakens our worst fear that Magnetek is becoming a
fatal distraction to digital development, a potential problem we thought had
been overcome a few months ago, when we became more positive on the company.
Clearly coping without a unified business plan in the wake of its
acquisition fumble, Power is taking the band aide approach to wellness using
all the standard patches, such as consolidating, streamlining administration,
and leveraging volume purchases. But the company will continue to lose money
through this year, rendering increasingly unlikely its goal to repay the
substantial acquisition-related debt with a combination of cash flows and
attractive refinancing. With cash and investments down to a meager third of
accounts payable and current credits, management may need to resort to a public
offering, a bleak prospect at the current stock price of $3.82. Thus, the
enterprise value of 0.8x the revenue run-rate may not be the bargain it appears
at first blush. Wall Street isn’t always irrational.
Like the perennially jinxed Joe Btfsplk of Lil Abner with the rain cloud
above his head, Power-One routinely encounters setback after setback, one
misfortune followed by two more. If you can sleep Prilosec-free after placing
your money under an eternal rain cloud, more Power to you. May you wake up one
day to a digital rainbow. Otherwise, move on to clearer skies, to the many
companies with upside potential as great or greater than Power’s, but minus the
muck and mire.
George Gilder, Gilder Telecosm Forum (5/9/07): Although I have lost enthusiasm for current management, I
think there is a ponderable chance for a buyout at these levels. I have no
special information on the point, but Power-One still commands unique
technology on the critical path toward the electronic and telecosmic systems
likely to dominate in the future. There is a lot of private equity money out
there and if I held more of it I might be sorely tempted by this ramshackle
muddle of brilliance and blunders.
To read additional posts by Charlie Burger and George Gilder, log on to the Gilder
Telecosm Forum, the web’s premier technology investment message
board: http://www.gildertech.com/board/
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Friday Feature / The Black Swan
Gilder Telecosm Forum Poster (5/8/07): Unless something unexpected happens between now and the end
of the book, I’d say Nassim Nicholas Taleb’s The
Black Swan is a must-read for just about everybody.
George Gilder, Gilder Telecosm Forum (5/9/07): The unexpected thing that happens in the Taleb's The
Black Swan is that it turns from a popinjay pedant's display of cleverness
and rakish disdain for people wearing red ties or other formal attire (such as
intricate equations), into a devastating critique of Modern Portfolio Theory.
After reading it you will never view the Bell's Curve and related Gaussy risk
assumptions without grave reservations. He shows that most significant risk,
upside and down, is uncomputable and incalculable; the calculable risks at the
heart of portfolio theory are trivial.
In the end, he retreats to absurdly conservative recommendations, as if
the prudent investor should spend most of his time hedging against "known
unknowns" such as nuclear war and unknown unknowns such as the apocalypse
of Krispy Kreme, and restrict equity holdings to 15%. But that aside, he grasps
the essential points behind a BetaZero fund, with ample exposure to upside
Black Swans--what we call hundred baggers (Google is his example). After a
gooey start, with a lot too much preening over small and often misleading
insights, the book hits its stride and become imperative reading.
Gilder Telecosm Forum Poster (5/8/07): George, you are spot on. What resonates with me is Taleb's
scathing denunciations of the ex post explanations of the red-tied flora and
fauna who populate Wall Street. The downside, of course, is that many of
Taleb's readers will see this as a problem to be solved as opposed to just an
externality to be amused by. The truth is that there are plenty of lucrative
sinecures out there and somebody's got to have them. God bless the guys who
make $10 million a year for being wrong. Seriously. Unfortunately, the
pervasive green monster that gives the Spitzers of the world carte blanche to
"fix" those externalities (like "overpaid" hedge fund
managers) is a real problem, and unfortunately, Taleb's
intellectual firepower may give the Spitzers plenty of ammunition. And yes,
he's a bit too snide, even sophomoric, but he makes points that are rarely
made, so his going-over-the-top is, in my view, forgiveable.
Taleb's own fund strategy, as he describes it, was to exploit the
mis-pricing of what he calls "bad" Black Swans. I agree with you that
his paradigm would also argue strongly for funds that attempt to exploit the
mis-pricing of good Black Swans.
To read additional posts by the Gilder Telecosm Forum members, visit http://www.gildertech.com/board/
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Friday Blogger
Bonus / Wal-Mart or Malpass?
Rich Karlgaard (5/10/07): Question of the day: Who is a
better predictor of the economy and stock markets, Wal-Mart Stores or David
Malpass?
Wal-Mart's worst
quarter in 28 years tanked the stock market yesterday. Have the housing bust
buzzards come home to roost? Are American middle-class and working-class
consumers finally tapped out? Is a recession in the offing?
Or is David Malpass
right? Malpass is the chief economist for Bear Stearns and an occasional
columnist for Forbes magazine. Since 2001, Malpass has forecast the
American and global economies with astonishing accuracy.
Have a look at what Malpass--still an optimist--wrote
yesterday. Then post your comments. Do you put your faith in Wal-Mart or Malpass?
Read what David Malpass wrote:
http://blogs.forbes.com/digitalrules/2007/05/walmart_or_malp.html
____________________________________
Readings /
The Weekly
GTI
http://www.gtindex.com/
Time to Market
http://www.globes.co.il/serveEN/globes/docView.asp?did=1000209634&fid=1176
Yahoo’s Poker Face
http://www.forbes.com/technology/2007/05/09/semel-yahoo-microsoft-tech-cx_bc_0509semel.html
China More Competitive Than Japan? So Says Survey.
http://www.forbes.com/business/2007/05/11/china-japan-economy-biz-cx_jc_0511chinasurvey.html
Gmail Users are
Younger, Richer…
http://mashable.com/2007/05/10/gmail-users-are-younger-richer-good-in-bed/
Disney sells 24 million TV shows through iTunes Store
http://www.macworld.co.uk/news/index.cfm?RSS&newsID=17988
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