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Will Google be next to fall?

What contributed to the steep rises in the semiconductor and Internet indices in the first week of 2006, and whether Google will fall when Microsoft changes the pricing system for its search engine.

Shlomi Cohen 10 Jan 06 13:23

Wall Street started 2006 off with a bang. The Nasdaq index gained 4.5% in the first four days of trading, and rose above 2,300 points for the first time since May 2001. The Dow Jones Industrial Average rose 2.3%, and is again nearing its 11,000-point resistance level, which is proving a hard nut to crack. The Philadelphia Semiconductor Index (SOX) soared 8.4%, and the Inter@active Week Internet index (IIX) leaped 7.3%.
What fueled this charge were the minutes of a Federal Reserve Board meeting published last Tuesday, the first day of the abbreviated trading week, together with the employment report published on Friday, the week’s last trading day. The employment report was a real supercharger, because from investors’ point of view, it was ideal. Averaging the employment reports for November and December gives a monthly average of 200,000 new jobs, which doesn’t exactly signal a recession. Even the price of oil, which climbed back to $64 a barrel, didn’t spoil the party.

The steep rises in the semiconductor index can be attributed mostly to the2006 International Consumer Electronics Show (CES) in Las Vegas, which ended on Sunday. The conference convinced investors that a few new waves of demand for digital electronics products were in store that would provide a good feed for chip companies all along the production chain. This includes fabless companies like Marvell Technology Group (Nasdaq: MRVL) and Broadcom (Nasdaq: BRCM); their suppliers, like Taiwan Semiconductor (NYSE: TSM); and equipment suppliers, such as Applied Materials Inc. (Nasdaq: AMAT).

What did not appear in the press last week also boosted the bulls. There was an almost total absence of profit warnings. In the semiconductor field, one company on the Nasdaq 100, Xilinx (Nasdaq: XLNX), which specializes in programmable chips, even issued a positive profit warning. Its share zoomed 15.5% on the week in response. Confirmation that another Nasdaq 100 share, Check Point (Nasdaq: CHKP), would not issue a profit warning for the fourth quarter boosted its share by over 10% last week.

The main reason for last week’s rise in the IIX was a new series of recommendations for Google (Nasdaq: GOOG), the industry leader. The target prices in these recommendations ranged from $550 to $2,000. Furthermore, the many announcements published at the Las Vegas conference of cooperation between Internet companies and entertainment content providers, and between companies in both of these categories and digital gadget manufacturers, contributed to rises in the entire Internet sector. Investors realized that the potential market would soon grow beyond desktop and laptop computer users.

Google’s 12% jump last week, following the new recommendations, and the $137 billion market cap reached by the company, are driving short player Bill Fleckenstein crazy. Fleckenstein has been known for years as somebody takes short positions mostly in technology shares whose prices he regards as inflated. Yesterday morning, he recommended on the MSM Money website that investors not take seriously the investment houses that recommended the Google share at astronomical target prices. He calls these investment houses “dead-fish houses”, as a reminder of the stench that arose from the recommendations during the bubble era.

Fleckenstein admits that he was way off in his estimation of how high Google could rise, but says that, fortunately, this mistake has cost him no money so far, because he didn’t touch the share last year. Not only was he wrong when he said that Google’s share price was horribly inflated; he also explains that he hates Google’s search engine, “because, essentially, all you get are ads.” He recommends that investors switch to another little-known search engine named Clusty.com, which he claims is more efficient than Google, and free of advertisements.

Fleckenstein alleges that businesses pay Google to have their name appear first in the results produced by the Google search engine, and says that Clusty’s search results are the actual results. He expresses wonder that, while every home has a TV remote control that can be used to skip advertisements, people use their computer mouses to find advertisements on Google. Fleckenstein attributes Google’s success to the Microsoft’s (Nasdaq: MSFT) failure with search engines. He says, however, that Google’s doom is approaching, because he believes that Microsoft will change the pricing structure for keyword searches, and then “it will be ‘game over’ for Google (as a stock).”

Fleckenstein dismisses Google’s positive momentum, saying, “everybody is gaga over Google.” He says that Google has sales of $6 billion a year and a market cap of $137 billion. He says that this value “means no more than did the valuation of $100 billion” that it reached several weeks ago. He says he doesn’t know exactly when the share will fall, but he warns investors that many of them will eventually lose money on the share, just as many investors lost money during the bubble era.

SanDisk Corp. (Nasdaq: SNDK) soared 17% last week, mostly towards the end of the week, because president and CEO Dr. Eli Harari wants to be as big as Apple Computer (Nasdaq: AAPL) CEO Steve Jobs: not in stage appearances, but in media player sales. Harari launched the new media players in the Sansa series at the Las Vegas conference, and declared that he wanted a share of the market currently dominated by Apple’s iPod, which has a 70% market share.

SanDisk’s new Sansa, called the e270, is priced for consumers at $300. It is thin and stylishly designed, and resembles the iPod. It has 6 gigabytes (GB) of storage capacity, compared with 4 GB for Apple’s nano-flash. I wouldn’t be surprised if today, Jobs launches an iPod at the same conference that outdoes Harari’s new Sansa, at least in storage capacity.

At any rate, investors were very enthusiastic, and pushed the SanDisk share up to new heights, after Harari informed them that there were currently 150 telephones equipped with a slot for the flash memory cards that he sells. Harari said that, within five years, there would be 500 million such telephones. He has added the potential for new U3 USB drives to telephones, and flash memory cards for the new digital cameras, as their pixels increase. People are now buying cards with greater storage capacities for these cards.

Smith Barney -- Citigroup analyst Craig Ellis, who recommends “Buy” for SanDisk, was not stunned by the share’s run, which brought it past his $69 target price. He says that several upcoming events will nicely support the two flash memory stocks he covers, SanDisk and M-Systems Flash Disk Pioneers (Nasdaq: FLSH). By the end of the month, good results will be published for the fourth quarter. The 3GSM World Congress on mobile communications is scheduled in mid-February, and Intel’s (Nasdaq: INTC) hardware conference will take place in March.

Ellis recommend “Hold” for the M-Systems share, with a target price of $41. He says that the share has more potential to rise in the near future than SanDisk. Meanwhile, he is not changing his recommendations for the two shares: “Hold” for M-Systems and “Buy” for SanDisk, although he says that M-Systems could rise 14% to his target price, while SanDisk has already exceeded its target price.

Published by Globes [online] - www.globes.co.il - on January 10, 2006

http://www.globes.co.il/serveen//globes/docView.asp?did=1000048723&fid=1176