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Early Earnings Reports Suggest Mobile Wireless Broadband Is Long-Term Investment Theme to Watch


Performance of individual companies is mixed but the trend toward mobile broadband internet is unstoppable and investable.

Although the bulk of earnings reports in media and communications come in the first half of February, several major companies have already reported and provided some insight into what to expect next month and where business fundamentals currently stand.

We have already heard from Google (GOOG), Texas Instruments (TXN), Verizon (VZ), and Apple (AAPL). Each report suggests that the accelerating shift from wireline to wireless communications continues unabated. Competition may be altering the fortune of individual companies, but there is no doubt that consumers and businesses continue to spend more time online while mobile and are willing to spend to support their new habit.

Mobile searches are exploding. Smartphone adoption was at its highest level yet in the fourth quarter. There are not usually a lot of things you can count on from Wall Street. Lately, you can't count on anything for even a few hours! One thing you can count on is that mobile broadband Internet is a profitable, long-term investment theme.

Let's take a closer look at the reports we have receive so far.

Google reported its first earnings miss ever. The stock has been crushed, down almost 10% now from its close immediately prior to the report. Earnings per share missed by 10%, but that was mostly due to nonoperating items. The stock is trading down because revenues missed by several hundred million.

A shift to emerging markets and mobile led to lower-priced search ads. Search volume soared above expectations. The Street is worried about this volatility. I think the worry is misplaced. Advertisers will follow eyeballs, and when they do, they will pay up for ads. Stick with the volume trends and be patient, as these measures have always been volatile at Google.

Texas Instruments is a leading semiconductor company. Over time the company has shifted away from communications products, but its results still provide some insights. On its conference call, management noted that communications were extremely weak in the fourth quarter. The company also forecast revenues for the first quarter of 2012 below analyst estimates.

At the same time, management indicated that the broader semiconductor market was showing typical signs of the bottom of a cycle. Texas Instruments is not broadly exposed to the smartphone market. Rather, it sells into service providers who were watching spending as the year wound down. I think the takeaway should be the bottoming of the cycle and the importance of being exposed to smartphones, tablets, and ultrabooks. Major communications semiconductor companies report next week. I expect the news to be good.

Verizon reported as expected. Smartphone sales were very strong but at the expense of margins. Subsidies on smartphones, especially the iPhone, pressure margins even as they lock in high-paying, low-churning customers. Verizon's smartphones appear to be heavily focused on upgrades. This is not as profitable in the long-term as stealing customers from competitors, but it does improve visibility and predictability of financial results. Comments from management on the 2012 outlook and capital spending should not upset current expectations across the wireline and wireless suppliers.

As I noted in my Apple recap yesterday, the company continues to produce outstanding numbers. Going back to the introduction of the iPod, this has been one of the greatest value creation and corporate growth stories of our lifetimes. The stock is not up nearly enough off the quarter. I recognize it is so widely owned that finding incremental buyers is difficult. And each leg up makes a lot of managers trim holdings to control position size. I've trimmed every hundred bucks since buying at $35. But Apple earned $35 in calendar 2011; $45, at least, seems likely in 2012. Cash is already north of $100, and probably grows to $140 this year. By December if the stock were unchanged, it would be trading at just $300 ex-cash against mid $40s in EPS or less than 8X earnings. That is absurdly cheap. I see the stock catching a bid soon in any decent market environment and running to $500 quickly.

In terms of the bigger picture, Apple's results cement the mobile broadband theme more than any other company. Some observers rightly note that iOS5 devices have some shortfalls versus other mobile OS like Android. However, Apple's success is what is driving consumers, businesses, and product and services suppliers to innovate and invest. I wrote it before but it bears repeating, "Apple's health is the greatest testament to the mobile broadband wireless theme."

Disclosure: Google and Apple are net long positions in the Entermedia Funds. Texas Instruments is a net short position in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Google and Apple are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

This column was previously published by SNL Kagan on
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Positions in GOOG, AAPL,TXN
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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