The market for post-secondary education is over $386 billion in the U.S.  Couple that with the fact that only 35% of adults have more than a 4-year degree and you have a big opportunity.

Online education providers realize this and are changing the way millions of students get their education.  Schools like University of Phoenix and DeVry have grown rapidly over the past decade and have no plans of slowing down.

The four largest providers in the online education market are all growing revenues in the 30% range YoY with solid cash positions and reasonable PE multiples given the growth rates.  See YoY revenue growth rates below.

The value proposition is simple.  Get a degree and increase your long-term earnings power.  The data supports this at a macro level as the chart below illustrates.

Source: U.S. Bureau of Labor Statistics, 2009 annual data

Investors benefited from owning shares in the online education sector over the last decade.  The chart below shows the 10 years returns as of the end of Q409 for Apollo Group (APOL) +378%, DeVry (DV) +203%, ITT Education (ESI) +1143% and Strayer Education (STRA) +976%.  Will this trend continue?

University of Phoenix is the leader in terms of revenue and students.  Phoenix has over 420K undergrads and 78K graduate students dwarfing all public universities that top out with ~50K students.

Profit margins in the sector are solid and relatively stable ranging from 15% to 25%.

Earnings yield provides a good way to compare returns vs alternative investments like the 10 year.  APOL and ESI look the most attractive with earnings yields over 7%.

Many people question the benefits of getting a degree online and the value proposition of the leading companies in the sector.  Below are some of the reasons often cited:

• When calculated by the federal standard used by the Department of Education, UOPX’s overall graduation rate is 16%, which, when compared to the national average of 55%, is among the nation’s lowest.
• For-profit education is heavily dependent on government funding.  Title IV accounts for a large percentage of revenue at four largest companies.
• Online Colleges spend a high percentage of profits on self-promotion/advertising that could otherwise be spent on improving the education.  See chart below.

The online education sector has been attractive over the last decade from an investor standpoint.  There are definitely issues with graduation rates and the general value provided to students but if you are looking for a growth sector with strong fundamentals, a compelling macro story, that tends to do well when unemployment rates are high this is a sector to consider.

Microsoft (MSFT) may be large and very profitable, but it has been on a steady decline over the past decade. The company peaked at over $600 billion in market cap in 1999 and is now valued at $250 billion (a loss of over $350 billion in value). Microsoft’s loss in market capitalization is higher than the value of any company today, to put that into perspective.

During the dot com boom, many companies started to create cloud based applications to power everything from business applications to email, and for the most part they failed. Today, more and more applications are moving to the cloud, and users are getting comfortable doing just about everything via the web, enabling access from an ever growing number of devices.

Microsoft is in an interesting place right now. The company has a huge windows and office business that is being attacked from all sides by Google (GOOG), Apple (AAPL) and open source software vendors.  Microsoft is a company without a clear vision, even though they have products that most of us still use on a daily basis. We think Microsoft will figure it out, but it is likely to lead to lower margins and a continued drop in market cap.

Let’s look at how the company is performing financially.

Top Line Growth

Microsoft announced revenue of $19 billion for the second quarter ending 12/31/09. Microsoft’s revenue increased 14% YoY.

“Exceptional demand for Windows 7 led to the positive top-line growth for the company,” said Peter Klein, chief financial officer at Microsoft. “Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth.”

Windows and Windows live managed to grow at nearly 70% YoY based on the strength of Windows 7.  The Server and Tools division was up over 2% but all other divisions posted YoY losses in revenue.

Profit margins improved in all divisions except online, which continues to lose money, but the long-term trend is down.

Valuations

Microsoft’s PE has also trended down over the last decade with profit margins. Right now, MSFT trades at less than 13 times next year’s estimates.

Conclusion

So what happens now? MSFT is a company with declining margins and lots of new competitors vying to disrupt its dominance in operating systems and business productivity applications. The market isn’t very optimistic in Microsoft’s ability to turn things around, given the low multiple being put on the company. We would avoid the stock until the company clearly articulates a strategy to address macro trends to cloud computing and open source software that doesn’t cannibalize its existing business.

As you are aware from the barrage of TV commercials, AT&T (T) and Verizon (VZ) are both vying for the growing wireless market with new phones, claims of the best wireless coverage and now dropping prices.

The charts below show why the fight continues to get more aggressive in the telecom industry.  The CAGR is expected to grow at a respectable 6.6% between 2007 & 2012.  Wireless is the largest segment and expected to grow from 47% of total revenue to over 56% by 2012. The total opportunity for global wireline and wireless revenue is projected to expand from $1.65 trillion in 2007 to over $2.27 trillion in 2012.

In addition, new entrants like Apple (AAPL) and Google (GOOG) are adding pressure as they rip down the walled gardens that have existed for too long and focus on consumers.  Apple’s goal is to sell hardware and apps while Google focuses on ads.  Gartner just released a report that estimates that Apple was responsible for 99.4% of mobile app sales in 2009.  AT&T and Verizon should have owned this market.  In any event, consumers are winning with better phones, more services, options and ultimately lower prices but this isn’t necessarily good for AT&T & Verizon.

Industry Overview

Wireless Accounts

Wireless is the most important category with the largest long-term opportunity for the carriers.  Verizon grew retail customers to over 86 million in Q309 and added 1.2M accounts.  Average revenue per user (ARPU) was 52.78.  See Verizon full report here.  AT&T has ~82 million wireless subscribers and an ARPU of $61.23.  AT&T added 2 million subscribers in Q3.

Revenue Growth

AT&T’s growth in revenue is closely correlated with the introduction of the iPhone.

iPhone on Verizon

2010 should get even more interesting as Verizon is expected to carry the iPhone and many users that have been frustrated with AT&T’s coverage may be all to excited to switch. Verizon’s red map commercials have been pretty effective in convincing AT&T customers that Verizon will allow you to use the iPhone as a phone.

Long-Term Growth

The chart below shows Verizon’s growth over the last 10 years.  Revenue grew by over 228% in the last decade but net income only grew .17%.

AT&T performed better over the last decade with revenue up 297% and net income up by 150%.

Capital Expenditures & Profitability

Both are spending heavily on CAPEX with Verizon spending 126% of operating income and AT&T at 85%.

AT&T’s profit margin consistently more than doubles Verizon’s in the 10% range.

Stock Performance

If you have owned either company over the last decade, you have seen the stock price drop considerably but the dividend has provided some relief.

Conclusion

The established telecom players could go the way of newspapers if they aren’t careful. Mobile usage is expected to explode over the next decade with lots of companies keen on disrupting the market.

AT&T and Verizon should stop focusing on each other and turn their attention to the consumer. Otherwise, you might see Apple, Google or some other player radically disrupt the entire industry more than they have to date.

AT&T is currently valued at nearly $152 billion with Verizon near $85 billion.  Like the overall the telecom industry, AT&T and Verizon generate lower profit margins, on large debt, with declining wireline businesses and high SG&A expenses.  In general, these are not the characteristics that drive strong earnings growth or strong stock performance.

The macro theme for the wireless space is extremely positive and we expect lots of innovation and some great investment opportunities.  However, AT&T and Verizon have not proven that they can adapt at this point and we are avoiding the stocks as a result.

You can access full telecom industry metrics or setup your custom watchlist here.

Since our Alpha launch in June, we have been growing rapidly and are approaching 50,000 users.  Users requested the ability to set up and personalize their watchlists on YCharts.  Today, we released this functionality.  You can set up your watchlist here. Once you set up your watchlist(s) it will appear on the upper left side of the front page.

Customize Fundamental Metrics

You can customize your watchlist to show any of the fundamental metrics that we track.  The real-time stream can also be set to show only news, tweets, videos of stocks that are in your watchlist.

Add Stock to Watchlist from Quote Pages

You will see a logo next to all company names when you are on a quote page.  Use this to add a company that you are researching to a watchlist.  See below.

Social Features (Public / Private Settings)

When you register you have the option to make yours watchlist(s) public or private.  If you choose to leave it public other users will be able see the stocks in your watchlist by visiting http://ycharts.com/profiles/username.

Our approach is to launch fast and iterate so expect a lot more functionality and social features over the next several months.  Feel free to post your ideas here.

The S&P 500 ended the year up over 26%.  Technology led the way posting a 60% return for the year with Google, Microsoft and Apple all adding ~$100 billion in market cap in 2009 or ~$274 million a day.

Apple (AAPL) was up ~150%, Google (GOOG) up over 100%, and Microsoft (MSFT) up over 60% for the year.  We analyze the key business metrics below to evaluate that attractiveness of the companies as we move into 2010.

Market Capitalization

Microsoft’s Market Cap is the largest at $276 billion up from ~$173 billion at the end of 2008.  Google’s Market Cap is approaching $200 billion up from ~$97 billion at the end of 2008.  Apple’s Market Cap is now $190 billion up from ~$76 billion at the end of 2008.

Growth and Profitability

Apple continues to have the strongest top line revenue growth at 25% YoY. Google’s revenue is up 7% YoY and Microsoft dropped 14%.   See revenue growth chart below.

Apple’s revenue is driven by innovative products including the iPhone, Mac and expectations are high for the iSlate tablet.   Google’s revenue growth has declined steadily as the search business matures and it has been unable to find a new revenue source beyond text ads.  Microsoft’s issues have been well documented but they do have the Windows 7 release that should improve revenues.

Gross Margins

Microsoft generates the highest gross margins at 78%, Google is consistently 63% and Apple is 37%.  See 10 year trends below.

Research & Development

Microsoft and Google both spend about 20% of their profits on research and development with Apple at just under 10%.

Profit Margins

Microsoft and Google have both consistently delivered profit margins in the 25 to 30% range.  Apple’s margins are lower at ~17% but have risen for the last 5 years with higher margin product launches like the iPhone.

Net Income

Microsoft more than doubles both Google and Apple in terms of net income but you can see that the difference is getting smaller as Google and Apple continue to grow at a faster pace.  Check the indexed chart to compare the growth rates.

EPS

The chart below shows the indexed EPS values beginning Q105.  You can see that Apple has grown EPS the fastest at 435% with Google at 298% and MSFT at 74%.  EPS has the highest correlation to price and explains why Apple has outperformed both Microsoft and Google during this timeframe.

Cash on Hand

All three companies have enormous cash positions.  Google has been the most opportunistic on the acquisition front but you would expect Microsoft and Apple to do more deals given their large cash piles and higher stock prices.

We see that all 3 companies have strong and consistent margins with Microsoft and Google having stronger margins but weaker on the top line than Apple.  Let’s move to valuation.

Valuation

Google’s TTM PE Ratio is over 40 with top line revenue weakening.  This includes Q408 which looks like an aberration.  Analyst estimates are for Google to earn $26.42 next year which gives you a 23.47 forward PE and YoY revenue growth of 17%.  Google is trying everything to grow top line revenue including acquisitions, Chrome browser, Chrome OS, mobile hardware and software.  Time will tell if they can enter these new markets successfully and diversify its revenue stream.  Google will continue to deliver strong profits but the growth story is concerning and the multiple looks a little rich right now.

Apple’s PE is over 33 but top line revenue growth is strong.  Analysts expect Apple to earn 7.81 this year ending Sept which gives you a forward PE of 27.  Revenues are expected to increase 23% YoY.  Apple is approaching our fairly valued price of $220 to $230 in the near term so we would not be adding to positions here.

Microsoft has the lowest PE Ratio at just under 20 with weak top line growth but it appears to be stabilizing and Windows 7 should improve things.  Analyst consensus is for 2.7% revenue growth in the year ending June 2010 and 8% in 2011.  The forward PE for the year ending June 2011 is ~15 based on 2.09 EPS estimates.  We see fair value in the $30 to $35 range.

Conclusion

Microsoft, Google and Apple have all had $100 billion plus increases in market cap during 2009 but continue to get into each others’ markets which should be good for consumers but may hurt margins over time. They are all trading near our fair value estimates so the upside may be limited in 2010 given the huge runs experienced last year. We would hold positions but not be adding at these levels.

Disclosure: Long GOOG, AAPL

You can access all fundamental, growth and valuation rankings here.

Banks have taken a lot of criticism and they deserve it.  As you know, banks make their money from interest rate spreads and charging fees on accounts.  Below we analyze these key business factors to determine the attractiveness of the banking sector.

Taxpayers bailed out the top money center banks with $145 billion in TARP Funds and allowed banks to recover.  See market cap impact below.

The fed continues to keep rates at abnormally low levels which helps banks borrow huge amounts of capital and lock in spreads.

Bank Response to Rescue

As all of this has taken place, the top money center banks proceeded to increase service fees and dilute shareholders.  Banks will generate close to $40 billion from service fees on their customer accounts this year and the trend is up and to the right.

For example, Bank of America generated over $10 billion in service fees during the last year.  This represents a significant part of BofA’s revenues at high margins.  As you can see below, Bank of America has steadily increased their service charges over the last couple of years.  You get the full details here.

BofA is planning to continue increasing fees and annual credit card fees are next.

“According to BofA spokesperson Betty Reiss, the annual fees would range from $29 to $99,  “We’re testing this to see what the feedback is.  Fees are being added based on “risk and profitability”.

All of the major banks generate a large percentage of their revenue from service fees and they do this at huge margins so a fair amount of the bottom line is driven by service fees.

What are the fees for?

WellsFargo details their diversified fee strategy below.

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The chart below is telling.  The big banks raised overdraft fees from $23.70 in 2002 to $33.43 in 2008.  The 41% increase in bank fees over 6 years has increased the banks bottom line and come from the weakest consumers for the most part.

Below are the top major money center banks by market capitalization.  JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).

Customer Experience

You are most likely a customer and have experienced the fees on cash withdrawals, bank account maintenance fees, credit cards and mortgages.  You may not enjoy being a customer but you have to admit that the business model is scaleable.

Business Metrics

The fed continues to hold rates low which enables banks to make solid interest rate spreads, banks continue to raise fees and capital ratios have improved (see below).

Tier 1 Capital Ratios

Improved Cash Positions

Real Estate Market

The big challenge in moving into the banks is anticipating the real estate market recovery.  If the real estate market doesn’t get worse or even improves a little the banks will be in much better shape.  The correction eliminated a lot of bubble wealth and appears to be stabilizing.

Real Estate Prices

Conclusion

We would cautiously get exposure in the banking sector.  The major money center banks have already paid back their TARP funds and diluted prior shareholders.  It is hard to see how the major banks will loose over the long-term given the accommodative fed policy, ease of generating and increasing fees, plus all of the safety nets in place thanks to their customers/taxpayers.

You can analyze all of the banks here.

People are shopping online and buying everything from books to electronics. Amazon.com is the place that over 75 million people use to make their purchases each month.

Amazon.com provides a great service but what about the stock?  We analyze the key fundamentals, growth rates, profit margins and relative valuations below.

Jeff Bezos the CEO of Amazon.com has surprised many over the years as he built (AMZN) into a major online retailer that is profitable and approaching $30 billion in revenue.  In 2009, investors have gravitated to the stock which is now valued at over $56 billion dollars after a 170% run up year to date.  See the dramatic market cap gains in the chart below.

Amazon.com Fundamentals

Let’s start with the fundamentals.  Amazon is an amazing low cost online retailer.  The investment thesis is often that they have a lower cost base due to the online focus. In reality, they operate on very thin margins just like every other discount retailer.  See the income statement below.  Revenue and expenses ramp but the thin margins do little to move net income up.

AMZN Income Statement

The Balance Sheet is strong and trending in the right direction.  Amazon does operate with lower debt levels than more traditional retailers and they have paid down their long-term debt over the last decade.

Cash Flow from operations continues to improve.  So, overall things are fundamentally sound for Amazon.com and as more people migrate their spend online Amazon will benefit.

Amazon.com Growth & Profitability

Amazon has impressive revenue growth for the category and is well above peers.

The question longer-term is how long can they continue to grow in the high 20% range year over year.  In five years, will Wal-mart (WMT), Costco (COST), Target (TGT) be able to compete more effectively given their relative scale and pricing power?  In addition, they are all building substantial online businesses.

AMZN Relative to Peers

We compared AMZN to Wal-mart and other large discount retailers for a reality check on key metrics.  Wal-mart, Target, and CostCo were included in our analysis for relative valuation, growth and profitability comparisons.  AMZN leads the pack in terms of top-line growth with ~28% YoY revenue growth.

Just keep in mind the relative scale of the companies.  For example, Wal-mart is expected to generate $432 billion in revenue next year compared to Amazon.com at almost $30 billion next year.  It will take just 25 and 1/2 days for Wal-mart to generate Amazons annual revenue.

Amazon.com generates profit margins in the mid 3% range consistently which is normal for discount retailers.

Amazon.com Valuation

Fundamentals, growth and profitability metrics are all positive.  Let’s move on to valuation.

Price to Sales Multiple

Amazon trades at ~2.6 times sales and well above the peer set that trade ~.50 times sales.  If AMZN were to trade at 2X its peers or 1X sales the market cap would be about 1/2 of the current $56 billion.

Earnings Yield vs 10 Year Treasuries

If you follow Buffett, you know that he often considers the earnings yield of buying the entire company vs 10 year treasuries.   In Amazons case, you could buy AMZN and generate 1.31% or buy treasuries and generate 3.60%.   The difference is significant on a $56 billion dollar investment.  You also have to factor in the risk of each investment.

Analyst Consensus & YPEG Ratio

20+ analysts cover Amazon.com, average estimates are for AMZN to earn 1.88 per share in 2009 and 2.53 in 2010 or 35% EPS growth.  Revenue estimates are 23.88 in 2009 and 29.84 in 2010 or ~25% YoY growth.  Assuming the analysts are correct, if you calculate the YPEG ratio by taking the 2010 EPS of 2.52 x EPS Growth rate of 35% you get a price of $88.  This is close to 50% below the current price level.  In addition, you would expect the EPS growth rate to continue to decline as AMZN grows.

Conclusion

After looking at the run up in AMZN this year and the relative growth and valuation we would consider moving out of AMZN at these levels and potentially moving to more traditional retailers like WMT if you want exposure in retail.  AMZN could fall 30%+ and still be considered overvalued at these levels.