Thursday, May 19, 2011

Cody Willard on Internet Pick and Shovel Stocks

Cody Willard has some interesting ideas about the boom in the cloud revolution. His ideas tend to dovetail ours especially the way he pushes Riverbed Tech (RVBD) that has been a big winner in our Opportunistic portfolios. What we also like is the concept of investing in the pick and shovel providers for internet companies such as the recent IPOs LinkedIn (LNKD) and Renren (REN).

Cody is very negative on the China internet plays as he basically follows Cramer's theory that all China stocks are basically scams with questionable financials. Agree that China companies have had a fair share of issues, but I don't see them that worst off then most American stocks.

With the boom of internet plays in China such as Youku.com (YOKU), Dangdang (DANG), Qihoo 360 Tech (QIHU), and RENN all provide the cash for the pick and shovel plays of China such as ChinaCache (CCIH). Maybe the company is a China scam, but at this point it provides and incredible cheap play into the sector.

CCIH recently reported Q1 numbers with 80% revenue growth. Some analysts were disappointed with earnings, but one needs to realize that the CDN market in China is just developing. Video players similar to YouTube.com are just starting up in China. CCIH has as much a need to spend on R&D and to reach scale in order to dominate the market as making profits. So far they seem to be balancing growth and a decent profit though it appears a lot of investors are disappointed that margins are going to be flat in the near term.

They guided to Q2 revenues that approach the upper 50% growth rate. The stock though has plunged. It was interesting watching Cramer interview the Salesforce.com CEO tonight on Mad Money. Cramer made a specific comment about how the blow out revenue numbers were more important then beating earnings estimates by just $.01. Funny how if that concept were applied to CCIH the stock wouldn't be trading with a Enterprise Value of 2x sales.

The future remains extremely bright, but the trading action is very perplexing. Trading might remain very frustrating near term as CCIH just doesn't have the institutional support to keep the price reasonable. Without that its too easy for them to fall prey to the scam fears.

Akamai Tech (AKAM) is the US version of CCIH or so claimed. They currently trade at 5x revenue even after weak guidance. AKAM expects sub 15% growth so go figure how they have higher multiples in a mature US market while the China market is now exploding with growth.

Watch the Cody interview and apply the concept to China.



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