Three Companies to Watch

I can’t say that any of these picks are surprising.

After poring over the Silicon Valley 150 list, there are several candidates. But I think there are three companies that are in particular peril heading into 2009 — Advanced Micro Devices, Sun Microsystems and Palm.

[From O’Brien: The three valley companies most vulnerable in 2009 – San Jose Mercury News]

I decided to look at this from the other direction, pick 3 companies that should weather the economic turmoil and do well. I’m limiting my selections to publicly traded companies and trying to avoid being obvious by picking something like Apple or Google.

1) Netflix: Solid management team and little in the way of serious competitive threats, Netflix is looking forward with a downloadable service that gets high marks and a pricing plan that is appealing. Their balance sheet is moderately strong, with the only caution flag being their cash fluctuates dramatically quarter-over-quarter. What is most in their favor in my analysis? Affordable entertainment that will be a firewall for most families… things will have be pretty bad before broad cross sections of the market find it necessary to cancel their $17 a month 3 DVD Netflix account. Potential weaknesses are a dependence on managing customer churn and physical infrastructure costs. Analysts have recently cut their ratings but that’s on valuation concerns following a rally on the stock, rather than operational issues.

2) eBay: This one takes a little explanation to frame it properly. First and foremost, if eBay does nothing different they will be in for a very rough year ahead, but if they kill that asinine price increase and make amends with their power sellers, they could turn things around. This is a company that should thrive in a down economy and with their stock having been hammered for the last 6 months it should be a bright spot to focus on. eBay has done so much wrong over the last year that I’m willing to bet they finally do something right and their market and brand position are strong enough to provide a good bounce back.

3) Oracle: Ellison gets a lot of credit for calling a big shift in the enterprise software market 3 years before his competitors figured out what was going on, even more so for staking $35 billion to executing on the strategy. Oracle has all of the parts that enterprise IT runs on, and while companies may slow down their IT expenditures they will not stop cold and just like those big oil tankers out at sea… they take a long time to come to a stop. Oracle’s maintenance revenue stream alone ensures healthy cash flow for years to come. Two areas that may come to flank them, the first being a good amount of debt on their balance sheet that will require servicing and probably has some significant covenants that will dictate a precise level of performance the company has to achieve. Secondly, software as a service and cloud computing are not their strong suites and the culture shift is daunting.