Simon Monger's  Instablog

VMWare, Inc. (VMW), Amazon.com, Inc. (AMZN), and Visa Inc. (V) may be trading at lofty multiples in this market, but these companies are historically cheap and well-positioned to emerge from the economic crisis in better shape than many investors realize.

VMWare Helps Companies Save

VMWare offers businesses a unique way to save money through what’s known as server virtualization. The software allows businesses to run multiple desktop environments off of a single server computer, which can lead to significant savings on hardware costs and energy bills. As a leader in this quickly growing industry, VMWare is well-positioned to grow larger.

During the third quarter, VMWare reported earnings of $83 million, or $0.24 per share, on revenues that grew 32% to $472 million. Currently, the company is trading for 46x last year’s earnings of $0.76 per share, which may be undervalued if industry growth continues to grow at double-digit rates, and if it remains a market leader despite increased competition.

Amazon Helps Consumer Save

Amazon.com is known for its low prices and wide selection, and remains a bellwether in the e-commerce industry. Meanwhile, the popular shopping destination is also turning itself into a middleman for third party transactions, warehousing, and fulfillment going forward. Combined, these factors could equate to continued growth and substantial profits down the road.

During the second quarter, Amazon.com reported net earnings of $142 million, or $0.33 per share, on revenues that increased 14.4% to $4.65 billion. Currently, the company is trading for 53x last year’s earnings of $1.52 per share, which may be undervalued given the company’s growth potential and historical multiples of closer to 90x earnings.

Visa May Profit from Rebound in Spending

Credit card companies like Visa are already benefiting from an increase in credit card usage as consumers transition from paper to plastic spending. However, the dollar volume of transactions has decreased along with consumer spending amid the economic turmoil. A recovery in these volumes could dramatically improve the bottom line in short order.

During the second quarter, Visa reported net earnings of $729 million, or $0.61 per share, on revenues that increased 2.7% to $769 million versus a year ago. Currently, the company is trading for 39.7x last year’s earnings of $1.79 per share, which may be undervalued given the company’s growth potential and historical multiples that were much higher.

Conclusion

The economic crisis has negatively affected many consumers and companies, who will likely remain frugal even after a recovery takes effect. As a result, some large companies that offer other companies and consumers ways to save money in already fast-growing industries could be well-positioned to profit handsomely following any recovery.

Even if earnings multiples do not expand, a substantial increase in forward earnings per share could spell a sharply higher share price. VMWare, Amazon.com and Visa all have favorable long-term industry trends and offer companies and consumers a way to save money – a winning combination when emerging from an economic crisis.

Disclosure: No positions.

MasterCard Inc. (MA) may not be in the most attractive industry – the financial services industry – but its unique business remains resilient amid the economic turmoil. The company beat Wall Street expectations when it announced a 26% increase in sequential net income in the second quarter, while continuing to see positive trends in credit card transaction volumes.

During the second quarter, MasterCard reported net income of $349 million, or $2.67 per share, on revenues that increased 2.7% to $1.28 billion. Meanwhile, the company’s capital and liquidity positions remained strong with $2.7 billion in cash and equivalents and $2.7 billion in equity. At the same time, its number of transactions increased 7.9% for the quarter.

Despite the increase in the number of transactions, the dollar volume of the transactions was 9.3% lower for the quarter, due partially to higher transaction fees instituted in April 2009. However, MasterCard’s focus on cost-cutting led to a sharp reduction in expenses, which helped it report a 2.9% increase in net revenues and a 10% jump in operating margins for the quarter.

Combating the Crisis

MasterCard believes that lower revenue growth rates for the quarter reflect the impact of the present global economic environment. In response, the company focused on improving their bottom line results, and reduced their operating expenses by 23% for the quarter. These near-term changes have partially offset lower revenue growth.

MasterCard plans to grow by further penetrating their existing customer base and expanding their role in targeted geographies around the world and focus on higher growth segments, including premium/affluent and contactless cards, commercial payments, debit, prepaid and issuer processor and terminal driving services.

However, MasterCard and its shareholders believe that the prevailing trend within the global payments industry from paper-based forms of payment towards electronic forms of payment creates significant opportunities for growth over the longer term. Many experts continue to peg this growth in the double-digits over the next five years.

Conclusion

Currently, MasterCard trades at 35x earnings and pays a small dividend of $0.15 per share or 0.29% yield. Given MasterCard’s strong position in the credit card marketplace, strong trends towards electronic payments versus paper payments, and expected double-digit long-term growth rates when the economy recovers, many experts believe that this stock is undervalued.

Disclosure: No positions.

NVE Corporation (NVEC) may not be the most well-known technology company in the world, but its products could pave the way towards smaller, more rugged devices that consume less power.

A Look at the Second Quarter

During the second quarter, NVE Corporation saw its earnings jump 54.4% to $2.93 million on revenues that increased 40.5% to $6.83 million. The improvement in gross margins was primarily due to a more favorable revenue mix, as the company saw an increase in contract research and development versus product sales revenues.

Despite the 311% jump in research and development revenues, NVE Corporation warned that the growth may not be representative of future trends and there can be no assurance of additional or follow-on contracts for expired or completed contracts in their 10-Q filing with the SEC. Meanwhile, the jump also led to a possible-temporary drop in expensed R&D activities.

NVE Corporation’s balance sheet also remains robust with $1.25 million in cash, a current ratio of 3.47, no long-term liabilities and a quick ratio of 20.66. Altogether, these metrics suggest that the company remains in strong financial condition in terms of both short-term liquidity and long-term debt to asset levels, which is good news for shareholders.

A Leader in Next-Generation Spintronics

NVE Corporation was founded in 1989 as Nonvolatile Electronics, Inc. and didn’t enter the Wall Street scene until 2003. Since then, the stock has surged from an IPO price of just $7.85 per share to its current price of more than $50 per share. The company’s technology, protected by 51 U.S. patents, serves customers ranging from St. Jude Medical to the U.S. Government.

NVE Corporation specializes in so-called spintronics, which takes advantage of the natural spin of electronics instead of their charge to transmit and store data. As a result, the technology can help create smaller, more rugged devices that consume less power than traditional electronics. From hearing aids to pacemakers, this technology is quickly revolutionizing several markets.

Future products may not be commercially proven, but they do represent some real potential. For example, NVE Corporation’s MRAM (or magnetoresistive random access memory) is a patented next generation version of traditional RAM that is more dense (holds more), faster (works more quickly) and less volatile (more rugged) than its alternatives like DRAM and SRAM.

Conclusion

NVE Corporation is a market leader in spintronics, which may become the next big thing in electronics. The company’s unique specialization, fast growing revenues, improving profitability, and reasonable valuation of less than 25x could make it a compelling value.

Disclosure: No positions.