Fisher Investments is a Woodside, California-based investment advisory firm founded by billionaire Kenneth Fisher. Fisher Investments manages $33 billion worth of equity assets, primarily adhering to a value-oriented approach, managing U.S., international and global portfolios.
The following is a list of five tech stocks (see table below) in which Fisher Investments has significant holdings. I believe Baidu and EMC are good growth stories, while Intel and IBM offer the Growth at Reasonable Price (GARP) proposition. Amazon has the highest PE among these stocks and appears overvalued. Hence I will avoid it.
Shares Held - 12/31/2011
International Business Machines Corp.
Source: 13F filing
My favorite stock in the above list is Baidu. Baidu is the market leader in the Chinese Internet search market, with an 80% market share. Baidu has seen excellent growth in the recent past and if we go by consensus estimates this growth momentum is expected to continue going forward (see table below).
FY-Dec.12 (Consensus Est.)
FY-Dec.13 (Consensus Est.)
Gross Margin (%)
Reported Net Profit
Reported Pre-tax Profit
EPS - Fully Reported
Source: Thomson Reuters
In the near term, ad spending in Baidu's key client segments like auto, travel, B2C e-tailers and traditional retailers is expected to remain strong. The company is expected to see a good uptick in ARPU as large advertisers increase their spending on search. In addition, Baidu's refinement of its Phoneix Nest bidding system is improving ROI for the advertisers and is likely to act as a catalyst for more SME adoption of online advertisements.
From a long term perspective, following are the three major growth drivers for the company:
● Significant under penetration
As Piper Jaffray's Analyst Gene Muster rightly noted Baidu currently has ~300k SME customers which is just 1% of over 30 million small businesses in China. As more of the SMEs adopt online advertising, Baidu can see meaningful growth in the next 3-5 years. Also, China's total online advertising spend to GDP ratio is still five to eight years behind the U.S. Thus there is a secular tailwind for the leading search company, Baidu, which will be the likely beneficiary as the normalization occurs.
● Potential Upside for the margins
Google reported gross margins of 78.11% in FY2011, while Baidu's margins were 73.13% in the same period. As Baidu's revenues continue to grow and the company sees a good operating leverage, I believe there is an ample upside for Baidu's margins. In the long term (5+ years) there is a good chance that Baidu's margins reach ~80%. However, one should note that this is a long term call. In the interim, Baidu's investment in mobile search, personalized front page, contextual ads, vertical search along with higher expenses in depreciation bandwidth and R&D are expected to offset some of the positive impact from the operating leverage.
● New initiatives
Baidu has invested in a lot of new initiatives to improve user experience and monetization. Baidu has refined its map search, mobile search, and music and social offerings. Last year, it launched a new landing page for registered users. The new landing page contained a directory with links to frequently used websites; a list of popular keywords; icons to launch apps integrated under box computing; and news feeds/tweets/status updates of social platforms that choose to integrate with Baidu. In addition to improving user experience and stickiness; these changes also help Baidu to better understand user preferences thus enabling a better ad targeting.
In addition to these major growth drivers, high barriers to entry in search business and Baidu's leadership position in the industry makes it a good defensive stock. Even Google (GOOG) wasn't able to meaningfully challenge Baidu's dominance in the past.
I believe Baidu can continue to post 50% plus growth for the next several years given its leadership position and the growth drivers I outlined above. At 22.8x forward PE the stock clearly appears very cheap on PEG basis and I believe it is an excellent long candidate.
Along with Baidu, I am bullish on EMC, Intel and IBM among Ken Fishers top technology holdings. However, I would like to avoid Amazon. Here is my brief analysis on these stocks.
- EMC Corporation is the market leader in the storage space, with over 25% of the market share. There is further room for growth as the proliferation of structured and unstructured data is expected to drive demand in storage capacity. Increased data center capex by companies such as Apple (AAPL), Google and Facebook (FB) indicate a positive trend in cloud computing and related services. EMC's product breadth with continued updates and market leadership in storage provides a strong foundation for healthy growth in 2012. I recommend a buy on the stock from the near- to medium-term perspective.
- Intel is the world's largest supplier of semiconductor chips. Improving trends in Cloud and High Performance Computing are expected to drive server processor growth going forward which will help Intel. The company's recent QLogic acquisition has increased its breadth of product line and strengthened its position in the super computing market. Intel's Data Centre Capex guidance further supports the server processors' growth and upside potential to its margins in 2012. With new product cycles (Ivy Bridge, Romley and Medfield) and investments in its manufacturing and R&D capabilities, Intel is expected to gain market share against its competitor Advanced Micro Devices Inc. (AMD). Intel is also committed to returning cash to its shareholders, with a healthy 3.1% dividend yield and $4 billion in stock repurchases last year. It has authorizations for a further $10 billion repurchase. Even with modest PC trends, the server market growth provides considerable upside potential for its near-term earnings and multiple expansion.
- IBM is a consistent performer, and has outperformed the S&P 500 in six out of the past seven years. It has doubled its profit in the last decade and has steadily expanded margins by over 800 bps, following a strategy to focus on higher margin enterprise software/ services/mission-critical hardware business, while divesting commodity businesses (PCs, printers, and hard disk drives). It is one of the most defensive tech vendors, and its high visibility annuity business accounts for more than 50% of revenue and 70% of profits. Last year, Warren Buffett also initiated a position in the company and IBM rightly fits the "Buffett Criteria" of a good business available at a reasonable valuation.
- Amazon is one stock in the above list that I would like to avoid. I find Amazon's stock pricey at 75x forward earnings. I understand the growth potential and current investment mode of Amazon (which is keeping earnings depressed), but the current price seems to be already pricing in a lot of positives. Also, I don't agree that growth in international markets will come easy for Amazon without any significant competition from the local players.