Growth in Rethink 50 focuses on companies that make small gadgets

Rethink IT, July, 2004

The Rethink 50 right now is made up of companies that combined have achieved revenues of $575bn, that are valued at the $191 bn of cash they hold, plus 2.2 times that combined revenue figure, at $1.44 trillion.

In the 30 days or so since Rethink IT last published, nine of the companies have reported, creating a combined annual revenue of $68.6bn, roughly 12.5% of the entire group. These companies have $20.5bn of cash in the bank and are worth this cash pile, plus 2.5 times their revenues in their current share values.

Share values for the entire 50 have gone up $51 bn during the month, and the nine that reported actually went down, rather than up, by less than 1%. This is typically what happens when a company reports. Investors have been hoping that it will report well and confirm that it was a good investment, and then some of them exit the stock looking for other gains.

The big winner in terms of share price has been Research in Motion (RIM), which continues to be a stock favorite with its Blackberry handheld email system, much loved in financial and senior management circles, which has been signing many operator deals this year around the globe.

RIM's share value went up 20% during the past month, a huge achievement for a company that is already extremely highly valued, a value that has now reached 13 times its revenues and 46 times its profit. Perhaps it had something to do with the company growing its revenues to 140% of last year's, a feat that no other business in the Rethink 50 came near to (although AMD and Business Objects did next best with a recovery from death's door and a big takeover respectively).

Funnily enough, another sector favorite PalmOne went up by 18.5% on the month to reach a $1bn valuation, way below RIM in value, but a significant movement.

Another company that makes small, cool gadgets, in the iPod, is Apple Computer and its share price has gone up in consecutive months. Initially this was triggered by a rumor that Sony was going to bid for the company, but subsequently by the strength of its bid to dominate the online music market. The company is clearly undervalued with revenues at a run rate of $8bn, and a value of just $11.6bn, although this is up from a recent value of under $10bn. Its revenue multiple is just over 1.1, but its profit multiple is of almost 40. Sentiment now believes that the margin at Apple is set to grow and it will drag profits up with it. With the European launch of iTunes and its impressive G5 server launched this week, it does have strong product appeal right now.

The Fujitsu price may owe some of its movement to how we at Rethink do currency calculations on market capitalizations, but it remains one of the least understood, and poorly followed technology stocks, despite being on a recovery road, valued as it is at cash plus either 0.21 times its revenues or 2.5 times its profits. This valuation is clearly not what the company is worth and instead relates in some measure to how US investors view overseas stocks and how they are constrained from investing in some of them.

Other big share climbers this month include Seagate and Mercury up around 11% apiece, Advanced Micro Devices (AMD) and the bluebloods, Intel and Cisco are all up around 9% or 10%.

The Intel share price has continued to suffer unfairly from its highly publicized Centrino delays. This is really old news and it is very uncharacteristic for the company to be late on anything anyway. Its profits have not missed a step. It is the most profitable company in the Rethink 50 (last quarter) and we think that it is set to continue improving profit into the medium term, whereas Microsoft is struggling to get all its ducks in a row and is beset on many fronts, not least of which are Linux and the European Commission antitrust suit (although Microsoft looks to have strong new revenues coming from digital media in the next year).

But Microsoft continues to have a premium value above Intel with its profits multiple after cash at 44 against Intel's 25. Are chip profits not as valuable then as software profits?

The biggest losers in share price this month are two of the companies that have just reported, in BEA and Novell, so let's see if we can see the market's reasons for this.

The BEA share value shrank 21% throughout the month, but the company returned a profit of $25m on revenues of $262m, a 9.6% margin. This was a poorer performance that the immediately preceding quarter, which had a $39m income and a 14% margin. BEA puts this down to seasonality, and to a reorganization of its salesforce and channels in the US, that cause disruption and which will continue to cause disruption for another quarter.

BEA said in a filing, "In the first quarter we implemented changes in our Americas distribution organization. These changes included signing relationships with a value added distributor and several value added resellers ... reassigning personnel to staff this.

"It will take time to transition customer relationships, to train the new personnel and to train the VARs. In addition, after the close of our first quarter of our fiscal 2005, the vice president in charge of our Americas sales organization resigned from the company."