The Marley Group

Just one day after seeing their shares slump 28%, following Oracle’s announcement that they would be entering the Linux market as a direct competitor, Red Hat’s (RHT) management is sending a message to Wall Street. In a show of great confidence in their future prospects, Red Hat’s Board of Directors authorized a $325 million buyback of stock and debt.

“We believe this repurchase program is in the best interest of our shareholders,” said finance chief Charles Peters. “It underscores our belief in Red Hat’s future and represents an opportunity to enhance long-term shareholder value.”

These words come in stark contrast to the visions of gloom and doom crafted by analysts yesterday. While investors speculated over the potential losses in pricing power and costumer attrition that Oracle’s entry may bring, Red Hat confidently issued this response to the news on their site. A few points that stand out…

Red Hat & JBoss Subscriptions

Q: Does Oracle’s announcement include support for the Red Hat Application Stack, JBoss, Hibernate, Red Hat GFS, Red Hat Cluster Suite, and Red Hat Directory Server?

A: No. Oracle does not support any of these leading open source products.

Hardware Compatibility

Q: Oracle says their Linux support includes the same hardware compatibility and certifications as Red Hat Enterprise Linux. Is this true?

A: No. Oracle has stated they will make changes to the code independently of Red Hat. As a result these changes will not be tested during Red Hat’s hardware testing and certification process, and may cause unexpected behavior. Hence Red Hat hardware certifications are invalidated.

Security

Q: Can Oracle produce timely security updates to Red Hat Enterprise Linux as they stated?

A: No. There will be a delay between the time a Red Hat Enterprise Linux update is issued and the time the source code makes its way to Oracle. There is no guarantee that the source code for the Red Hat Enterprise Linux update will work correctly when integrated into Oracle’s Linux code base; this integration and test will take additional time. In the case where the update corrects critical security flaws, Oracle customers may be exposed to additional risk.

Disclosure: Joseph Urgo does not have a position in Red Hat.

As mentioned in the research note Why Sirius Internet Radio Is Significant, Sirius.com visitors have been able to listen to Sirius Internet Radio for free both yesterday and today.

Judging from preliminary Alexa traffic stats, it looks as if Howard Stern and Sirius (SIRI) were successful in creating a good deal of buzz for their newest offering. As of 10:00 PM, Alexa shows Sirius as being the 768th most trafficked website in the world today, compared to their three month average ranking of 2,087th.

In classic Peter Lynch style, we decided to take their free preview for a spin and tuned into the Howard Stern show for a few hours. The service was very fast and the sound quality was superior to that of the majority of internet radio streams. Sirius was very well prepared for the traffic surge from a technical standpoint.

More interesting though, was the wide geographic differences between listeners dialing in to The Stern Show, with calls coming from countries such as Germany, China, and England. These callers demonstrate the global potential for Sirius Internet Radio. The market for Stern is not confined to the United States. Their stable of sports content should also have demand outside of the United States, with growing global interest in the NBA and NFL and the popularity of soccer worldwide.

As the end of their free trial approaches, this looks to have been a positive event for Sirius. However the two day spike in traffic will be meaningless if traffic levels return to their previous levels once the trial expires. The next week’s traffic data should give a much clearer look at exactly how effective this campaign really was.

Disclosure: Joseph Urgo does not have a position in Sirius.

Strong Buy
12 Month Target $32.00

The Marley Group has issued a strong buy rating on shares of Yahoo! (YHOO), following up the earlier released research note Has Yahoo! Bottomed Out?. Coverage on Yahoo! is being initiated with a buy rating and a 12 month price target of $32. Discounting the $10 in cash and equity investments that Yahoo! has on their balance sheet, we see fair value for Yahoo!’s business at $22 per share based on our FY 07 earnings estimates of $0.72 and a reasonable P/E ratio of 30, considering an earnings growth rate estimate of 30% for the year. We believe that Yahoo! has the potential to earn $0.72 in FY 07, an upside of $0.12 to current consensus estimates, with the roll out of their long awaited search marketing platform upgrade and continued enrichment of their user experience through new offerings and the continued integration of smaller acquisitions. Yahoo! is well positioned to capitalize on the expected surge in online video advertisement growth and continued shift of marketing budgets towards the web and away from old media. Considering our downside estimate of $22 per share on Yahoo!, the risk here looks small when considering the upside potential for shares after losing more than 40% of their value this year. We view Yahoo! as a very attractive investment at current levels.

Disclosure: Joseph Urgo does not have a position in Yahoo!.

Following their dismal Q3 Report, investors sent shares of Yahoo! (YHOO) to their lowest levels since March 2004. Despite the fact that they still sport a P/E ratio of 48, they are starting to look like a value stock in some respects.

While at first glance Yahoo!’s P/E ratio looks very high at 48, it is necessary to take Yahoo!’s cash and strong investment portfolio into consideration. This investment portfolio includes a 34% equity stake in Yahoo! Japan, worth between $6 and $7 per Yahoo! share, as well a stake in Chinese internet company Alibaba worth about a $1 per share. Add almost another $2 per share of cash on hand and you get nearly $10 per share in cash or equity stakes. To get a better picture of what the street is currently valuing Yahoo!’s business at, we can knock $10 off the current share price of $23 and determine that Yahoo!’s business is currently being valued at $13 per share outstanding. This adjustment will greatly effect all of Yahoo!’s valuation ratios. Their forward P/E ratio falls from 39 to 20, compared to 32 for Google. Their expected Price to Earnings Growth ratio falls from 2 to 0.8, much lower than Google’s PEG ratio of 1.1.

While shares of Google should trade at a premium to Yahoo!, the difference between their forward P/E ratios, 32 and 20 respectively, is too great. Following another disappointing quarterly report, shares have been driven low enough that Yahoo! now looks like a value play relative to their peers in the volatile internet sector. This should guard against further downside in the stock. Shares should have downside of $22, guarded by the ratios discussed earlier and a new $3 billion buyback announced just last week. Both analysts and management have lowered their predictions to levels where future surprises to the upside are much more likely. Not withstanding a downturn in the market before the end of Q4, the only way shares of Yahoo! should see lower than $22 is if management feels the heat to acquire and overpays for a major web property, most likely Facebook, after Google’s highly publicized acquisition of YouTube for $1.65 billion.

Yahoo! announced that they have started rolling out their long anticipated upgrade to their search marketing platform, which is expected to help Yahoo! better compete with Google for advertisement revenue. Yahoo! continues to enrich their user experience with widespread beta roll outs of their new mail service, a much improved homepage, and improvements to their popular Finance site. They have also been quietly strengthening their video offerings after purchasing video sharing site JumpCut and video advertisement firm AdInterax. The combination of these events may be what the company needs to get some momentum behind them once again, and could very reasonably lead to an upside surprise on both the top and bottom lines. After falling more than 40% this year, it appears that a bottom may finally be in place for Yahoo!.

Disclosure: Joseph Urgo does not have a position in Yahoo!.

On October 16th, Sirius Satellite Radio (SIRI) announced the launch of Sirius Internet Radio. This new service allows users to listen to more than 75 channels of Sirius programming, without a radio, for the standard monthly subscription fee of $12.95. To mark this launch, Sirius.com visitors will be able to listen to Howard Stern for free on October 25th and 26th.

A one week chart of Sirius will show that this news has been written off as insignificant by Wall Street. Shares have actually fallen from $3.88 to $3.80 in the six trading days since news of Sirius Internet Radio has been out. However, the launch of Sirius Internet Radio is a significant event for the company. By streaming their content over the internet, their programming is instantly much more broadly accessible to potential subscribers. While customers will still have to pay the same monthly fee to listen to Sirius online, they no longer have to purchase an equipped radio receiver. Sirius has amassed an impressive stable of exclusive content, the most noteworthy being Howard Stern. Sirius Internet Radio gives the company a second distribution channel to leverage this exclusive content, at very little in terms of cost.

Already leading the satellite radio industry in net subscriber additions for the past four quarters, Sirius Internet Radio should help bolster additions in the all important retail sales category, which has been dominated by Sirius since the signing of Howard Stern. It is reasonably optimistic to believe that this service could yield between 200,000 and 500,000 subscriber additions by the end of 2007. With a monthly fee of $12.95, that would translate to an additional $31,000,000 to $77,000,000 in annual subscription revenue. Additional subscribers will also help drive growth in advertisement revenue for the company. For Sirius to achieve positive free cash flow, they will need to continue to add to their subscriber count while keeping costs under control. Sirius Internet Radio will help the company do just that, as it costs virtually nothing to stream content over the web yet makes their programming available to anyone with internet access.

Disclosure: Joseph Urgo does not have a position in Sirius.