Monday, February 28, 2011

Video: Swiping Mastercard: China Watch

NEW YORK (TheStreet) -- With China predicted to overtake the U.S. as the largest market for credit card companies by 2020, contributor Eric Jackson details how companies like Mastercard are trying to capitalize on China and whether investors should buy in.
Mon 02/28/11 06:00 AM EST -- Eric Jackson & Brittany Umar
Stocks in this video: DFS | V | GS | JPM | AXP | BAC | MA

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Shanda Shows Promise

By Eric Jackson
RealMoney Contributor

2/28/2011 1:45 PM EST
Click here for more stories by Eric Jackson

Shanda Interactive Entertainment (SNDA - commentary - Trade Now) will report its earnings before the market opens tomorrow morning. Though Shanda has become lost in the shuffle of other Chinese technology names, 2011 could prove to be a good year for its stock. Several positive trends are blowing at the company's back. Moreover, the overlooked nature of the stock could play in investors' favor.

In this piece, I have highlighted some of the trends and initiatives that are helping Shanda along. Followers of this stock should pay attention to updates during tomorrow's conference call.

Online Gaming

Shanda came to prominence 10 years ago due to the popularity of its online games. The company was around long before anyone in North America had ever thought of the idea of online gaming. Due to Shanda's success in the space, it was able to spin-out Shanda Games(GAME - commentary - Trade Now) in 2009 as a separately listed company. However, Shanda (the parent) and Shanda Games have seen their respective prominences in this hotly competitive niche wane in recent years. Much like movies, online gaming is a "hits" business.

Because Shanda has not been as strong in the space recently, the market has significantly discounted the company's stock. It's doubtful that analysts will upwardly revise their price targets for the stock until there is clear evidence that the company has a hot new game on its hands. As an investor, though, you have to look for earlier signs of an upward move in order to make money.

Several signs indicate that Shanda's gaming business may be about to turn the corner. Its big game that's currently in development is called "Legend of the Immortal." This game was designed by a small, core team within Shanda. Shanda's management has recently said that it will be to Shanda what Mickey Mouse is to Disney (DIS - commentary - Trade Now). That's quite a comparison. The player community within China is equally excited about the game.


[*** This post is an excerpt of the full article, available by clicking here to go to Note: subscription required. ***]

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Friday, February 25, 2011

Video: Shopping for Best Buy: China Watch

NEW YORK (TheStreet) -- Contributor Eric Jackson details Best Buy's plans to restructure in China and his outlook on playing the stock.
Fri 02/25/11 06:00 AM EST -- Eric Jackson & Brittany Umar
Stocks in this video: AMZN | HGG | EBAY | GME | CONN | BBY |RSH

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Give NetEase a Second Look

, On Thursday February 24, 2011, 3:00 pm EST

Amid all the recent attention that major Chinese Internet companies have been receiving, one has been left out of the discussion: That is, until last night. The company announced some very strong results that propelled the stock to a big jump this morning. Here's what you need to know about the company and why you might want to take a second look. is one of the first-generation Chinese portals from 10 years ago, along with Sina and Sohu -- never made it past the dot-com bubble., which actually uses the URL "" in China, has quietly been growing its revenue over the last few years, benefiting from the growth of the Chinese Internet market. Annual revenue went from $303 million in 2007 to $550 million in 2009. In last night's earnings report, we learned that annual revenue in 2010 went up to $857 million. That's quite a nice ramp.

Net profit for fiscal 2010 was $339 million, up from $173 million in 2007. In other words, net margins were 40% last year on a billion-dollar business.

The top-line fourth-quarter numbers for NetEase were 12% higher than what Wall Street analysts were expecting. This growth came from a boost of 13% from growth in online games quarter on quarter and 44% from online advertising in the quarter.

This surge in advertising growth was apparent in Sohu's results a few weeks ago. That surprise from Sohu led to a one-month gain of 22% while the Nasdaq has basically been flat. This growth in online advertising will likely take center stage next Tuesday when Sina announces its quarterly results. It would be hard to believe that it won't ride the same rising tide to a strong quarter.

NetEase said that for the rest of 2011, it expects strong advertising demand to continue. The company specifically called out the auto, Internet services, consumer electronics, apparel and food and beverage industries as areas where it is seeing the greatest demand. The company will continue to push its games. It is preparing to launch Starcraft II and Cataclysm. It also hopes to make inroads in online air ticketing (although this is never a business with great margins).

NetEase doesn't have a shiny new microblogging tool like Sina's Weibo site. It's also not nearly as well known in the U.S. as Sohu. However, its anonymity is part of the reason you might want to take a closer look here. The stock jumped 10% this morning, as the Street was caught off guard by the positive results. However, even with that gain, NetEase is up 25% in the last year. Even though that beats the Nasdaq's return of 22% over that same period, it vastly trails the 66% one-year return from Sohu and the eye-popping 112% return from Sina.

NetEase -- again, with this morning's move included -- is selling at a forward price-to-earnings ratio of 15x for a company that has grown its earnings by 25% a year for the last three years. Sina's forward P/E ratio is 38x. NetEase also has an enterprise value to EBITDA ratio for the last 12 months of less than 11x. Sina's is 44x.

The low-profile nature of NetEase -- and its lagging stock price compared with its peers -- is a reason you might want to own the stock. In the worst-case scenario where it continues to lag its peers, you still have a good chance of beating the U.S. market's returns.

But you might want to use these positive results to also re-examine Sohu. Despite its 66% move in the last 12 months, Sohu is still very "cheap" compared with Sina, with a 15x forward P/E and a trailing enterprise-value-to-EBITDA of less than 9x.

Also, Shanda Interactive is announcing its quarterly results on Wednesday. Shanda is another value-play Chinese stock like NetEase. Shanda was once a leader in the online gaming space, but it has since been forgotten. Expectations are low, and the stock is cheap and has been bumping along $40 for several months. An upside surprise would give a boost to the stock. NetEase's 12% increase in online gaming revenue is a good sign for Shanda.

Finally, don't forget BitAuto, which will release its earnings on March 3. It has an auto listing revenue model, rather than a heavy portal advertising model, but it might also benefit from a healthy auto space in China.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider BITA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Eric owned SINA and SNDA at the time of publication.

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Thursday, February 24, 2011

China's Complex Inflation Problem

By Eric Jackson, Senior Contributor02/24/11 - 06:00 AM EST

NEW YORK (TheStreet) -- The Chinese government and a chorus of US critics have criticizedFederal Reserve Chairman Ben S. Bernanke's "quantitative easing" (QE2) program since its announcement last November as a direct cause of white-hot commodity inflation.

According to this view, Bernanke unfairly unleashed inflationary forces which China and other countries have to grapple with.

Bernanke has correctly pointed out that China and others could very quickly lessen the effect of U.S. policy by de-pegging their currencies, like the yuan, to the U.S. dollar.

Hedge fund manager Paul Tudor Jones went so far recently in an investor letter as stating the U.S. should force a de-pegging, as it was adding an extra 4% to the U.S. unemployment rate.

In the letter, Tudor Jones discussed the downside to China of their "unsustainable" policy: "one way or the other, the real U.S. and Chinese exchange rate will find equilibrium -- either through nominal movement or through relative inflation rates." He would say we're seeing the latter today.

While I agree that de-pegging the yuan from the dollar would be the single most effective move the Chinese government could make to curb inflation in China, they are unlikely to do so. Even if they did, more action would be needed to quell it.

Over the last 10 years, especially since the 2008 crash, the Chinese government has taken several actions which, although correct at the time, have fanned the price of commodities more so than QE2. Such moves include:

  • The 2008 stimulus package that pumped $584 billion into the Chinese economy. In 2010, China's M2 money supply rose 19.7% over the prior year. With money supply now at 73 trillion yuan, it is larger than China's GDP of 67.5 trillion . By comparison, the U.S. M2 as a percentage of GDP is close to 0.6. That will create some inflation.
  • For many years, the Chinese government has artificially kept prices of electricity, water, and natural gas low through subsidies to promote economic development. Unfortunately, this has promoted waste by end users and was expensive to the government. Last year, they increased these prices to true market levels. This came as a shock to many and added to perceptions of greater inflation.
  • To deal with an over-heated high- and middle-end housing problem in coastal cities last year, the Chinese government implemented a number of draconian macroeconomic policies. They've worked as hot money has been taken out of the housing sector. Yet, evidence existsthat speculation and hoarding has flowed into food items such as onions, beans, peanut oil, corn, ginger, apples, and sugar. Food CPI increased by almost 12% last year, which contributed to two-thirds of the overall increase in the Chinese CPI.
  • The Chinese government has been trying to migrate the Chinese economy from one driven by foreign exports to domestic consumption. This is seen as more stable and less vulnerable to some foreign Lehman-like shock in the future.

    The government's efforts have been successful. Last year, Chinese consumer spending increased 18.4% to 154 trillion yuan from the prior year. Yet, such consumption doesn't occur without requiring more raw materials to build televisions and appliances. It's a big reason why -- in the last year -- cotton was up 88%, wheat 54%, sugar 38%, and copper 21%.

  • The migration of many rural workers to bigger cities to pursue higher standards of living have resulted in stories of "empty villages" back in the country with insufficient labor to grow the needed crops. Lower agricultural demand in turn drives up prices. China has been a net importer of food for many years already. As purchasing power increases in the coming years, the Chinese desire to feed themselves a higher protein diet will further exacerbate prices.
  • With an expectation that the yuan will need to be revalued upwards in the coming years and with China's relative outperformance in the global economy, hot money continues to flow into China . That creates additional inflationary pressures.

Beyond these factors, 2010 saw sand storms in Inner Mongolia, droughts in Southwest China, an earthquake in Central China, floods in Hainan Island, and drought, fires and floods in Russia and Pakistan. All these kept an upward pressure on Chinese commodity pricing.

So, while none of these actions by the Chinese government was wrong at the time, it's clear they now have a difficult balancing act of keeping their foot on the gas to drive economic growth will tamping down inflation.

Simply de-pegging the yuan from the dollar won't eliminate all inflationary forces bubbling at the moment. However, the Chinese government would benefit in the long run more from a more rapid increase in the valuation of the yuan than their current go-slow approach. There will continue to need to be increased interest rate and reserve requirement hikes to help moderate the economy.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Video: The Complex Roots of China's Inflation

Contributor Eric Jackson says China's inflation is white-hot and has more to do with past actions its own government has taken than Ben Bernanke's QE2. Swift action is needed this year by the Chinese government to get the problem under control
Thu 02/24/11 10:23 AM EST -- Eric Jackson
Stocks in this video: YUAN | USD | MACRO | FXI

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Wednesday, February 23, 2011

Video: Why Apple Should Buy Facebook for up to $100 billion

Contributor Eric Jackson says there's only one company big enough to buy Facebook: Apple (AAPL). The combination would be a potential Google (GOOG) killer and too intriguing for Mark Zuckerberg to say no.

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Video: NXPI is riding the NFC wave

Contributor Eric Jackson says that NXP Semiconductor (NXPI) is perfectly position to ride the Near Field Communication (NFC) trend this year allowing your mobile device to do mobile payments.

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Why Apple Should Pay $100 Billion to Buy Facebook

By Eric Jackson02/23/11 - 11:54 AM EST

NEW YORK (TheStreet ) -- Apple(AAPL_) currently has a $315 billion market capitalization, with $60 billion in cash on its balance sheet. Analysts speculate it will use the money to start paying a dividend, do stock buybacks, or do an acquisition. There is one company that should be on the top of Apple's shopping list: Facebook -- and Apple should be willing to spend up to $100 billion to get it.


Last October, Steve Jobs made an unexpected appearance during the quarterly analysts' call and was asked his intentions for the cash pile.

He responded: "We strongly believe that one or more very strategic opportunities may come along that we're in a unique position to take advantage of because of our strong cash position." In other words, they will only use this money for acquisitions.

Until now, Apple has only made small, sub-$100 million acquisitions like music streaming service Lala. A year ago, it bought mobile advertising company Quattro Wireless for $300 million. Although there were rumors six months ago that it might make a play for chip-makerARM Holdings(ARMH_), Apple has never done a $1 billion acquisition.

But, we shouldn't mistake inaction for inevitability. What could a "very strategic" opportunity be for Apple to acquire? A chip-maker would help them increase their gross margins, but it isn't a game-changer.

In my view, the only company out there that could represent a huge increase in the opportunity set in front of Apple for the next 10 years is Facebook.

Interestingly, a week before Jobs' appearance on the analyst call last year, the LA Times reported that Jobs invited Facebook CEO Mark Zuckerberg to dinner at his house. The topic of conversation reportedly centered on Apple's new social networking service called Ping.Although the service was initially designed to allow iTunes users to share their song preferences with their Facebook friends, Jobs pulled the plug on this after Facebook tried to impose "onerous terms" on Apple.

Enabling Facebook to connect with Ping could certainly be lucrative for Apple. One media executive told me recently their traffic went up 30% immediately when they enabled this feature to their site. However, this alone isn't sufficient grounds for justifying a Facebook acquisition.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Video: Yahoo! Trading at Half What It Should Be

Contributor Eric Jackson explains that in the disdain for the Internet company's stock, the true value of Taobao and Alipay is being missed.
Wed 02/23/11 08:00 AM EST -- Eric Jackson
Stocks in this video: YHOO | AMZN | EBAY | DANG | YOKU | MSFT

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Why I Love Yahoo!

By Eric Jackson02/23/11 - 08:00 AM EST

NEW YORK (TheStreet) -- I have had a love-hate relationship with Yahoo!(YHOO_) for five years now. I have always thought the stock was undervalued and primed for a turnaround that could unlock value. That's why I longed the stock and led an activist campaign against it. Unfortunately, even though the campaign resulted in former CEO Terry Semel quitting in 2007, the company's board muffed the chance to sign a deal with Microsoft(MSFT_) leading to the company's stock price to collapse. It's really never recovered.

Yahoo!'s new CEO is into her third year at the helm of the Internet company. Most investors and analysts are fixated on her efforts to turn the business around. When you listen to the earnings calls, 95% of the discussion from Carol Bartz and her CFO, Tim Morse, focuses on the wholly-owned business.

Yet, despite the company finally biting the bullet and doing needed layoffs and closing underperforming or overlapping businesses -- things that have been obvious to many for years -- my interest in Yahoo! is purely based on its private stake in Alibaba Group, the parent company of, Taobao and Alipay.

There has been some general talk among investors who don't follow Yahoo! closely that Yahoo! should "monetize" the Asian assets. By this, I think they are suggesting that Yahoo! divest its stake in Yahoo! Japan and Alibaba Group. There also seems to be a lot of hope that private equity will come in and buy the wholly-owned company. Remember the spike-up in shares we saw a few months ago when rumors circulated that AOL(AOL_) was going to team up with private equity to make a bid for Yahoo!?

To me, all the private equity talk and concern about the current or future health of the Yahoo! core business is a side-show. I believe most of Yahoo!'s largest shareholders believe -- as I do -- that the real value-creation in Yahoo! shares will come when the market sees how big Taobao and Alipay are going to be in the next 10 years.

Let's do a sum-of-the-parts on Yahoo!

Tim Morse discussed last week that they are looking into a tax-free spin-off of their Yahoo! Japan stake. At recent market prices, Yahoo!'s 35% stake in Yahoo! Japan is worth $5.76 per share.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Friday, February 18, 2011

NXPI: Riding the NFC Wave

, On Thursday February 17, 2011, 2:30 pm EST

Near field communication (NFC) is a new technology that's getting some buzz from the Mobile World Congress that just took place in Barcelona. It seems like every major phone vendor was discussing how it planned to incorporate NFC into its phones this year.

Over on the flagship site, I discussed yesterday how Apple might incorporate NFC into their future iPads and iPhones. Apple has not disclosed any of its plans for NFC, but the company hired a well-known product manager away from startup mFoundry to head up Apple's NFC efforts last fall.

The majority of the media focus on NFC has had to do with payments. We will soon be able to use our phones to swipe at some point-of-sale machine at a cash register, and the NFC technology will link the payment to some account you designate.

Believe it or not, you will be able to buy phones in the next year that claim they have NFC technology, but it will be no more than an extra sticker they've put on the package. The problem with that version of NFC technology is that it isn't as secure as most of us would like when our money is on the line.

The robust version of the service that all the major phone manufacturers will roll out this year uses NFC-enabled semiconductor chips. The leader of the pack in the space is NXP Semiconductors NV . NXP was spun off from Philips last summer. The stock has some big-name private-equity firms and hedge funds behind it, including KKR, Bain Capital, Silver Lake, Third Point and OZ Management.

NFC was discussed as a phone feature last year, but it definitely was not on the front burner. Many thought of it as an incremental feature to the product, like a front-facing camera. However, as NFC has grown in popularity among phone makers, the stock of NXP has increased. It's now doubled since its IPO last August.

This week in Barcelona, Google and Research In Motion both announced support for NFC. Google is definitely using NXP chips in its latest version of the Android operating system. RIM didn't give out any details on what it might use at the chip level. Until a few months ago, RIM hadn't shown much interest in NFC, except maybe with sticker support. Back in 2009, RIM declined to take part in a major NFC trial in Canada sponsored by Visa and the Royal Bank of Canada .

On Tuesday, NXP released its fourth-quarter results and first-quarter guidance. Some were hoping for big guidance that would propel the stock forward and perhaps tip off that the company would be supplying Apple's new products this year. We didn't get that specificity or huge guidance, but the outlook was bright -- and certainly management is being conservative here.

NXP said that 70 million NFC-chip-enabled phones would be sold in 2011 and 120 million would be sold in 2012. That's huge growth ... and probably understated. As the leading player in the space today and with a partnership already in place with Google, NXP looks to be well positioned to capture most of the growth in this nascent segment. Rumors have swirled for months that Apple will choose NXP as its NFC supplier. We'll have to wait and see.

Beyond payments, NFC technology allows you to tap your phone to another device to share information; you can wave your phone near an item at a store to see deals or special information; and NFC-enabled phones will let you "check in" on various platforms. We're going to see many new location-based applications written for phones because of this technology.

Perhaps because there wasn't an Apple-specific announcement on Tuesday's earnings call, NXP's stock price traded down a little afterward. But the buyers came out in droves on Wednesday -- the stock had one its biggest-volume trading days in its short life as the stock jumped about 10%. The jump was partially spurred by higher targets and positive statements from Goldman Sachs and Credit Suisse; both analysts were bullish on the company's future growth ramp.

It won't be an open market for NXP. Both Broadcom and Qualcomm have made small NFC-related acquisitions in the past few months. They will compete hard to win in the space. There are also smaller competitors like On Track Innovations , which already has relationships with Visa and MasterCard .

But NXP is definitely in the sweet spot to pick up most of the new growth. It will increasingly be an attractive acquisition candidate if growth continues to pick up. This stock is definitely one to watch for the next year.

[Eric was long NXPI and AAPL at time of publication]

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Wednesday, February 16, 2011

Video: Watch Out Visa And Mastercard, Apple Is Coming For You

Contributor Eric Jackson says Apple (AAPL) has its eye on getting into the mobile payments market thanks to Near Field Communication technology. They could be a major threat tobig credit card companies and EBAY's PayPal unit.
Wed 02/16/11 12:08 PM EST -- Eric Jackson
Stocks in this video: V | JPM | EBAY | AXP | BRCM | BAC | NXPI |AAPL | MA

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Video: JDSU Partying like it's 1999...

Contributor Eric Jackson says JDS Uniphase (JDSU) is back. It's selling the gear to help telcos keep up with bandwidth demands and has the gesture components powering Microsoft (MSFT) Kinect.
Wed 02/16/11 12:06 PM EST -- Eric Jackson
Stocks in this video: T | Q | ALU | JDSU | MSFT | HPQ | GLBC

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Why NFC Could be Another Game-Changer for Apple

By Eric Jackson02/16/11 - 08:00 AM EST

NEW YORK (TheStreet ) -- When you're a $330 billion market cap company, you need big things to move the needle. Apple (AAPL_) knows that.

Look at Microsoft (MSFT_). It has the hottest thing in gaming right now with its Kinect gesture control device. It sold 8 million units in the first quarter of its availability, blowing away expectations. It's going through huge upgrade cycles right now in Windows 7 and Office. Yet, the stock is trading down, since announcing its earnings last month.

When Apple announced iPad a year ago, most of the initial coverage focused on its name. (Remember that?) Many skeptics remained -- until they started using one and found out they couldn't live without one.

This is classic Steve Jobs. Don't ask customers what they want. Why? Because they don't know what is possible to create in the future. Instead, give them something they've never experienced but which will be a "must have" once they touch it.

From Apple's viewpoint, iPad was going fill a critical middle-ground between iPhone and the Mac. And if they could create a new product category from nothing, that would create a "meaningful" amount of revenue for them.

The analysts totally blew their job of estimating how big iPad would be last year before it went on sale. Shaw Wu of Kaufman Bros. said in March that he thought they would sell 2 million iPads for the year. The uber-Apple bull, Gene Munster of Piper Jaffray, said in March they would sell 2.8 million in 2010 (though he upped his estimate to 6.2 million by June). Katy Hubert of Morgan Stanley and David Bailey of Goldman Sachs were the most bullish of the analysts, who thought that Apple could ship 6 million iPads for the year. In the end, Apple shipped over 14 million tablets.

So, what are the experts missing at the moment about Apple? The company has a number of irons in the fire at the moment and several could develop into major areas for the company. But I'm most interested in what they're going to do in the area of Near Field Communications (NFC). NFC is a technology that -- after merchants install necessary point-of-sale hardware -- will allow users to pay using their mobile phone rather than a traditional credit or debit card.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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