Mobile Internet as the Next Big Investment Opportunity: Internet Trends Presentation

Morgan Stanley recently issued a technology presentation focused on internet trends that we found intriguing from an investment standpoint. In the past, we've covered how many hedge funds have made large wagers on technology and in particular the mobile internet. They've placed these bets via:

- smartphones
- wireless transmission of data
- spectrum
- cloud computing
...and more

Morgan Stanley takes a look at internet trends in-depth and confirms (if it wasn't already obvious enough) that yes, mobile internet is the next big thing. In short, MS thinks that the mobile internet will eclipse the desktop internet in five years time. What's interesting is that they also highlight that social networking users surpassed email users back in mid 2009. So instead of telling people to email us, maybe we should instead solely tell people to follow us on Twitter and to become our fan on Facebook. Mobile internet has certainly helped facilitate this trend as people can access their information from almost anywhere, anytime.

MS notes that we are just in the early innings of the mobile internet cycle, in what they deem the "5th cycle of the last half century." Mainframe computing was big in the 1960s, mini computing in the 70s, personal computing in the 80s, desktop internet in the 90s and now mobile computing in the 2000s. And of course they highlight that Apple (AAPL) is leading in mobile innovation (at least for now). Thus it should come as no surprise that AAPL is one of the most popular stocks among hedge funds. Morgan Stanley believes that pricing, application ecosystem, and user experience will be the big drivers for success in the mobile devices arena.

They then touch on infrastructure and how 3G is key to the success of mobile internet. Well, hedge funds are already hot on that trail as the wireless transmission of data has been a big theme in portfolios. Hell, Phil Falcone's hedge fund Harbinger Capital even announced their own plans for a 4G wireless network. The takeaway here is that mobile phone usage is increasingly focused on data usage, not voice usage. We've touched on how hedgies are playing this theme via wireless tower stocks as mobile service providers scurry to increase speeds and meet rising demand.

The other big keyword these days is the 'cloud,' as in cloud computing. MS identifies Salesforce.com (CRM) as the company to look towards if you want to play the trend there. Central storage of information that is accessible from anywhere will be a key focus going forward. MS also notes that Amazon.com (AMZN) could benefit from this having already revolutionized commerce. Not to mention, we recently saw that David Stemerman's hedge fund Conatus Capital is bullish on cloud computing as well. In addition to those aforementioned stocks, it's clear that the likes of Apple (AAPL) and Google (GOOG) will benefit from the emergence of mobile internet. After all, that's why they are some of the top stocks owned by hedge funds.

Below is Morgan Stanley's recent presentation on internet trends:



You can directly download a .pdf here.

If you're looking to connect the dots between trends and investment opportunities, we highly recommend you check out hedge fund Coatue Management's technology trends presentation. Philippe Laffont started this technology focused hedge fund in 1999 and you can view Coatue's portfolio here. Some of their recent position activity includes doubling down on their stake of STEC (STEC), a producer of solid-state storage drives. They are definitely one of the go-to hedge funds if you're looking for technology related investment ideas.

Data seems to be the common link in the latest technological trends as the world is increasingly focused on: the storage of data, the wireless transmission of data, and the ability to access that data from anywhere. While data may be a focal point, mobile internet is certainly the trend.

Two Reasons To Be Bearish

.... At the very least for the short-term. While we could throw out all kinds of economic data and a laundry list of fundamental problems, we instead want to focus on two market related datapoints. Firstly, short interest was recently released and the fine folks over at Bespoke have highlighted that, "the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% This is the lowest level since February 2007." They also point out that extremes typically happen in each polar direction. When short interest is high and all the late-to-the-party bears have arrived, the market can run. Conversely, when short interest is at the lows, be scared.

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That information all but ties into what hedge fund manager Doug Kass highlighted recently: everyone is bullish and rushing into stocks. Mutual fund inflows have risen and they have put their new cash to work while hedge funds have had their highest net long exposure in some time.

The second datapoint we want to highlight is not so much data as it is a flowchart of market possibilities. Specifically, we are talking about the four stages of secular bear markets. Barry Ritholtz over at the Big Picture has posted up an excellent chart that illustrates just that.

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As you can see, it argues that we are almost out of the 'rebound rally' phase of the secular bear market. What's on deck next, you might ask? A roughly anticipated 25% correction downwards, assuming this is a secular bear market. That's a whole 'nother debate but we wanted to post up these interesting tidbits as we start to become cautious ourselves. After all, the market is up over 50% since the March 2009 lows. While such caution is most likely warranted, we could be early with such sentiment. (Forgive us for such a sin as 'being early' ... we attribute this to the volatile market of 2007-08 that has scarred us for life). And as always, we are reminded that markets can remain irrational longer than you can remain solvent. In the mean time, our list for reasons to be bearish continues to grow.

Are Newspapers a Dying Industry?

The recent news out of Sun-Times Media adds yet another name to the list of pre-bankruptcy/bankrupt newspaper chains. Not only are newspapers seeing decreased advertising revenue and decreased circulation, but many are trying to stave off crushing debt loads. Even newspapers who have relatively successfully navigated things thus far are showing some signs of weakness. The Wall Street Journal has benefited by providing focused, niche content and by recognizing the digital shift. As such, they began to provide digital content and immediately started monetizing it. But, although they've had relative success there, they are still fighting for readers as they offer a 75% discount. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

If you have been following our twitter updates, you would have seen us shorting New York Times (NYT) back at $7.70 and covering down at $4. Currently, we are not involved and figured it would be prudent to survey the macro landscape as it relates to the industry. Then, in a future post, we'll survey the NYT in particular (which we've highlighted before due to the ownership presence of hedge fund Harbinger Capital Partners and Mexican billionaire Carlos Slim). We want to focus on them due to the fact that their current status is very representative of many other industry players. Their battle with monetization and various business plans is well documented so far. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

The industry itself is facing a few key issues including crushing debtloads, decreasing revenues/circulation/readership, a secular shift, and a battle with their kryptonite: monetization. We want to start by pointing out the excellent article out of Slate last week on this very topic. Basically, Daniel Gross lays out the facts that the newspapers filing for bankruptcy are ones that have been stockpiled with debt and/or idiotic management decisions. He highlights great points that many have analysts have brushed aside. But, he also admits that some industry players (mainly smaller ones) are in trouble. The core of the problem here is the debtload many newspapers face. It doesn't help that they've been hit with the perfect storm of debt loads, decreasing revenues, decreasing circulation/readership, and the worst economic situation since the great depression. We're in the eye of the storm and this hurricane has simply taken their problems and magnified them tenfold.

The problem though, is what will they do when things stabilize and return to 'normal'? If the economy were to recover tomorrow, then advertising revenues would pick back up (which would help their cash cushion and delay their debt-duel a little bit longer). But, they still have the problem of decreasing circulation and/or readership. Readers are trading physical papers in favor of online media. And, if this truly is a secular trend, then newspapers have a much larger problem at hand. How can they monetize things besides advertising? The New York Times' struggle is the perfect example of this very problem. Do they charge for some content? All content? Who knows? It's a tough sell in an environment where information becomes freer by the day.

Newspapers are fighting three concurrent battles that are all a function of each other. They can't truly fix their business woes until they find a way to increase revenues and monetize their digital content. Cash infusions are merely a quick fix and most likely do not solve their long-term problems. Newspapers are like drug addicts because that quick ‘hit’ of cash feels good, but they are still left wanting and needing more. Assuming the trend plays out, more and more readers will shift to digital and they have to find a way to make money from that. This brings us to the second battle: monetization. This in and of itself will probably be the trickiest for them. They can shift with the trends and give readers what they want, but can they make money off of it? The answer thus far is: not really. We'll simply have to wait and watch this giant tug of war of trial and error before we can gain more insight. Lastly, you have the battle with readership and circulation. Circulation for the most part is down, and readers/subscribers of print versions are down. To compensate for this, they've ramped up their digital content, staying in line with the trend. But, this reverts back to their problem of truly monetizing the digital content through various (thus far ineffective) business models. Not to mention, they are trying to do so in an modern-day world where information is everywhere and more often than not, it is free.

The uphill battle they face is depicted (ironically enough) by the NYT. Below, you'll see their illustration of changes in circulation and revenues across the country:

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Go here if the graphic is still too small to read after enlarging. Obviously, the industry has a lot of headwinds and the fact that stubborn majority owners control many of them doesn't seem to be helping things (if you're a shareholder). While companies like the NYT have made strides in raising cash to fight off near term maturities, they are seemingly just drawing out the inevitable battle with their debt destiny.

Simply put, it is way too early to gauge if newspapers are a dying industry. And, those attempting to proclaim their death prematurely are oblivious to the daily evolution of all forms of media. We do not think that newspapers as an entire industry will succumb to this economic quicksand. Don't get us wrong though, we're bearish on the industry longer-term and feel they are battling a rising secular trend without a concrete gameplan. As many traders say, "The trend is your friend." Until it's not.

That's the wrench in this whole equation: trends and innovation. Newspaper companies could come out tomorrow and completely revolutionize and revitalize readership and their streams of income with some new amazing "thing" that no one could have ever predicted. It’s not likely, but stranger things have happened. We would be inclined to present an alternative outcome for the industry. While the physical newspaper itself may in turn slowly die, the industry as a whole will be forced to morph and evolve into a new means of distribution, a new medium/platform, and a new business model. If they don't, and the debt finally crushes them, then they'll die. That's the catch. Everyone is on the lookout for the death of the industry, when they instead should be focusing on who will morph and evolve, and who won't. There will be survivors, but they most likely won't be a 'newspaper' in the true sense of the word.

With this we arrive at no firm conclusions and a lot of "we'll wait and see." This is mainly because media in and of itself is constantly evolving and changing. The ball is in their court and we have to wait for their move before declaring death to their industry. We like to look at it as more of an evolution and metamorphosis with hints of Darwinism. The physical newspaper itself may die, but the industry players will be forced to morph into some new iteration of a media player. We've already begun to see the big push in terms of digital content. But, what's next? Those who figure it out will survive. In the end, it's all about the numbers: their debtload, the number of readers, and how much revenue they can generate. However, one cannot overlook the non-numerical input: secular shifts & trends. And, right now, the trend is most definitely not their friend.