David Einhorn is the president and founder of Greenlight Capital, a value-oriented hedge fund. Unlike other funds, Greenlight does not leverage its positions to increase returns, and the fund does not generate large trading volumes. Nevertheless, since the fund's inception in 1996, Greenlight has generated more than a 25% annualized net return. Einhorn is best known for short-selling positions, most famously Allied Capital and Lehman Brothers, and his aggressive shorts in financials helped Greenlight prosper in its early days. However, he holds mostly long positions, emphasizing intrinsic value to achieve consistent returns and safeguard capital against market conditions. According to his second quarter portfolio update, Einhorn added to his position in Microsoft (MSFT), Seagate Technology (STX), and Apple (AAPL).
Einhorn initiated his current holdings in Microsoft in the first quarter of 2009 when shares were trading at a five-year average low of $18. He bought 1 million shares of the company and later added another 2.4 million when prices began to climb back to an average of $24.19. In 2010, he more than doubled his holdings at an average price of $27.93, though prices have declined slightly since then. After adding another 1,385,000 shares in the first quarter of 2011, Einhorn again increased his position by an additional 63.4% this past quarter at an average price of $25.04, impacting his portfolio by 3.19% and giving him a total of 14,819,042 shares in the company.
Microsoft develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers, and intelligent devices; server applications for client/server environments; knowledge worker productivity applications; and software development tools.
According to Microsoft's fourth quarter report for the period ended June 30, revenue was a fourth quarter record of $17.37 billion, up 8% over last year. For the fiscal year, revenue was $69.94 billion, up 12% over last year. Strong sales in Server and Tools products, the 2010 Microsoft Office system, and the Xbox 360 platform helped lead the revenue increase in both the quarter and the fiscal year, partially offset by lower Windows revenue. Operating income was $6.17 billion for the quarter and $27.16 billion for the year, up 4% and 13% respectively as a result of the revenue increase though operating costs increased. Cost of revenue increased 17% in the quarter and 26% for the year, due to higher costs associated with online offerings, and increased volumes of Xbox 360 consoles and Kinect sensors sold. Overall, net income increased 30% to $5.87 billion for the quarter, and net income for the year was $23.15 billion, up 23% over last year.
Among Microsoft's different business fronts, Microsoft Business Division revenue grew 7% in the quarter and 16% for the year as Office 2010 sales continued their strong performance. Server & Tools revenue grew 12% in the quarter and 16% for the year, the fifth consecutive quarter of double-digit growth, led by Windows Server, System Center, and SQL Server. Windows and Windows live Division revenue declined 1% for the quarter and decreased 2% for the year, largely due to the impact of the prior year Windows 7 launch. Online services Division revenue grew 17% in the quarter and 15% for the year, driven by increases in search revenue. Bing's U.S. search share increased 340 basis points year-over-year. Entertainment & Devices Division revenue grew 30% in the quarter and 45% for the year, carried by the ongoing momentum of the Kinect console and Xbox Live.
Microsoft generated $5.3 billion in free cash flow in the quarter, up 9.4% over last year's $4.8 billion. Overall, the company generated $24.6 billion in free cash flow for the year, up 11.5% over last year's $22.1 billion. Capital expenditures totaled $2.4 billion, up slightly over last year's $2.2 billion. The company's debt-to-equity ratio was .209, down slightly from last quarter's .223. Return-on-equity was 41.2%, slightly up over last year's 40.6%.
Microsoft has a market cap of $212 billion. Its stock trades with a P/E ratio of 9.5, below its ten-year average. Its P/S ratio is 3.0, also below its ten-year average. Quarterly sales per share have been increasing over the past decade, causing its P/S metric to decline over the same stretch. Its P/B ratio is 3.7, near a ten-year low, and book value per share has almost climbed back to its 2004 peak. GuruFocus has awarded Microsoft a predictability rating of 4.5-stars.
On 8/15/2011, Google (GOOG) announced that it has entered an agreement to purchase Motorola Mobility (MMI) for $12.5 billion. This has fueled speculation as to whether Microsoft will make a move on to acquire a hardware developer in order to match Apple's (AAPL) and Google's model of developing both the hardware and software aspects of their smartphones. Currently, Microsoft has an agreement with Nokia (NOK) when the latter agreed to make Windows 7 OS phones. The move also puts Microsoft in legal conflict with Google over Android patents, as Microsoft and Motorola are already involved in a number of claims on each others' technology.
Seagate Technology (STX)
Einhorn first bought his current position in Seagate Technology in the first quarter of 2011, purchasing 3,268,957 shares of the company at an average price of $13.82. In his most recent move, Einhorn more than doubled his holdings by adding an additional 251.96% to his holdings at an average price of $16.37, impacting his portfolio by 2.84% and giving him 11,505,373 total shares in the company. The price has since decreased by 29%.
Seagate Technology is the worldwide leader in the design, manufacturing, and marketing of hard disc drives, providing products for a wide-range of applications, including Enterprise, Desktop, Mobile Computing, Consumer Electronics and Branded Solutions. Seagate's business model leverages technology leadership and world-class manufacturing to deliver industry-leading innovation and quality to its global customers, and to be the low cost producer in all markets in which it participates.
According to Seagate's fourth quarter report for the period ended July 1, revenue was $2.86 billion, up 7.6% over last year's $2.66 billion. However, gross margin decreased from last year's 27.4% to 19.3%, and net income for the quarter was $119 million, down from last year's $379 million. According to Steve Luczo, Seagate's chariman, president, and CEO, "Seagate and the industry are benefitting from the significant demand for storage related to new applications and architectures associated with mobile and connected devices. For the June quarter, Seagate’s average capacity per drive shipped grew to approximately 590 GB, an increase of 39% year-over-year." Seagate also returned $77 million to shareholders by announcing its first dividend in nine quarters this past quarter at $0.18 per share.
For the fiscal year, the company reported revenue of $11.0 billion at a gross margin of 19.6%. This compares to last year's revenue of $11.4 billion at a gross margin of 28.1%. Net income was $511 million, down from last year's net income of $1.6 billion. Despite the decreased earnings, Luczo notes, "Because hard disk drive storage is a fundamental technology for cloud service providers, data centers and all other network-based content providers, total industry demand grew almost 40% in fiscal year 2011 to 330 million terabytes. As more online content and services become available to billions of connected mobile devices, we expect demand for storage capacity to continue to grow and Seagate to benefit from this growth." Additionally, Seagate repurchased $822 million of Seagate ordinary shares in the fiscal year.
On 4/19/2011, Seagate Technology and Samsung Electronics Co. announced that they have entered into a definitive agreement under which the two companies will significantly expand and strengthen their strategic relationship. Major operational elements include Samsung combining its hard disk drive operations into Seagate, extending and enhancing the existing patent cross-licenses agreement between the companies, a NAND flash memory supply agreement under which Samsung will provide Seagate with its semiconductor products for use in Seagate's products, and a disk drive supply agreement under which Seagate will provide supply disks to Samsung for PCs and other consumer electronics. In addition, Samsung will receive significant equity ownership in Seagate and an executive of Samsung will be nominated to join Seagate's Board of Directors. Seagate will pay $1.375 billion, half in stock and half in cash, to Samsung.
According to the press release, the agreements "significantly expand Seagate’s customer access in China and Southeast Asia" and "enable Seagate to secure an important source of leading-edge NAND flash supply as the company expands its SSD and solid state hybrid product offerings, and position Seagate to be a more significant supplier of disk drives to Samsung."
Seagate has a market cap of $5.1 billion. Its stock currently trades with a P/E ratio of 9.6, slightly below its five-year average. Its P/S ratio is 0.5, also below its five-year average. Quarterly sales per share are at a historical high at $6.65 per share. Its P/B ratio is 2.1, again below its five-year average. However, Seagate's debt-to-equity ratio has been increasing over each of the past three quarters, now standing at 1.43.
Apple Inc. (AAPL)
Einhorn first bought Apple back in the second quarter of 2010 when the stock was in the middle of quadrupling its early-2009 prices. He purchased 312,500 shares at an average price of $254.74. He added another 525,000 shares the next quarter at an average price of $259.91. In the second quarter of 2011, Einhorn added to his position by 28.66% at an average price of $337.60, impacting his portfolio by 1.72% and giving him 1,077,500 total shares in the company. The price of Apple's stock has since increased by 11%, netting him a 47% return on his initial purchase.
Apple Inc. designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Its core products include the Mac line of computers, iPhone smartphones, iPad tablets, and iPod music players. In addition to its online and retail stores, the company sells digital content and applications through its iTunes Store.
According to Apple's third quarter report for the period ended June 25, the company posted record quarterly revenue of $28.57 billion and record quarterly net income of $7.31 billion. Revenue increased by 82% over last year's $15.70 billion, and net income increased by 125% over last year's $3.25 billion. Overall, gross margin also increased in the quarter to 41.7%, up from last year's 39.1%, as a result of a more favorable sales mix towards products with higher gross margins, a weaker U.S. dollar, and lower manufacturing costs.
Driving the growth in revenue was a 179% increase in revenue from the iPad and related products and services. iPhone sales were similarly strong, increasing 150% in revenue. Total Mac net sales increased 16% over last year, with growth in both desktops and portables. The only product to report a year-over-year decrease in sales was the iPod, down 14%, though music related products and services saw sales increase by 29%.
Apple currently has a market cap of $350 billion. Its stock trades with a P/E ratio of 14.9, near its ten-year low. Its P/S ratio is 3.5, slightly above its ten-year average. Quarterly sales per share are at a historical high at $30.90 per share. Its P/B ratio is 5.0, below its five-year average and slightly below its ten-year average. Book value per share has grown exponentially over the past six years, now at a high of $74.98 per share. Apple carries no long-term debt on its balance sheet. Gross margin has been improving over the past five years, currently at 41.7%, and return on equity has also been trending upwards, currently at 42.2%. Apple has also generated consistent free cash flow over the past five years, and it generated $10.3 billion in free cash flow last quarter.
On 6/6/2011, Apple introduced its iCloud, a "breakthrough set of free new cloud services that work seamlessly with applications on your iPhone, iPad, iPod touch, Mac or PC to automatically and wirelessly store your content in iCloud and automatically and wirelessly push it to all your devices." The iCloud will be available in the fall concurrent with iOS 5.
On 7/20/2011, Apple announced the release of Mac OS X Lion, the eighth major release of the company's operating system. The new OS introduces more than 250 new features to the Mac. The company reported that over one million users bought the new OS on the first day of its release.
On 8/16/2011, Taiwanese smartphone maker HTC Corp. accused Apple of violating three patents covering smartphones and other technologies, the latest in an ongoing dispute between the two companies.
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