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Author Archives: Chris Versace, Chief Investment Officer

About Chris Versace, Chief Investment Officer

I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."
Content is King movie studios eyeing Connected Society solutions like  Apple iTunes rentals

Content is King movie studios eyeing Connected Society solutions like  Apple iTunes rentals

 

Through our thematic lens, we see this as Content is King meeting the Connected Society, a theme that has led to much creative destruction over the last several years. With Netflix (NFLX), Amazon (AMZN) and now even Apple (AAPL) moving into proprietary content that is streamed to wherever and whenever consumers want, perhaps it’s about time the movie studios ranging from Sony (SNE) to Disney (DIS) and 21st Century Fox (FOXA) get on board. Should it come to pass, it will smack Regal Cinema (RGC), AMC (AMC) and other movie theater businesses right in the high margin snack business. We suspect the Cash-strapped Consumer is hoping for such a move to happen.

Movie studios looking to set up early-access rentals with companies like Apple and Comcast may reportedly push ahead with those negotiations and skip revenue sharing with theater chains, if the latter don’t reduce their demands.Early-access rentals would let people stream movies through services like iTunes just weeks after their premieres, possibly while they’re still in theaters. To appease exhibitors, studios have discussed a revenue split, but balked at proposed long-term commitments up to 10 years, according to Bloomberg sources. For the end customer, early rentals would likely cost between $30 and $50.

Source: Movie studios may sidestep theater chains in deals for early Apple iTunes rentals

Tencent scales thematic investments in payments, AI and cloud

Tencent scales thematic investments in payments, AI and cloud

Our Content is King theme isn’t the only one getting a lot of attention this week as more companies look to invest not only in payments, which we see as Cashless Consumption but also artificial intelligence, a slice of our Disruptive Technologies theme. As we look at these moves, we are reminded of the global nature of our investing themes. This means that Amazon (AMZN), MasterCard (MA), Visa (V), Facebook (FB), Alphabet (GOOGL), Apple (AAPL), PayPal (PYPL) and the like need to be aware of moves made by Tencent (TCHEY), Alibaba (BABA) and other players outside the US.

Tencent, the Chinese mobile games and social media company, is gearing up to increase its investments in online payments, cloud services and artificial intelligence.Still, with competition on the rise in the digital payments market, the investments are necessary. “We think there is still a lot of growth potential from Tencent’s cloud and payment business,” BOCOM International Analyst Connie Gu said in the Reuters report.

China’s Tencent isn’t only investing in artificial intelligence, payments and cloud services. Earlier this month, it showcased how it is also investing in other areas. Essential Products, the smartphone company that was started by Andy Rubin — the creator of the Android mobile operating system — raised $300 million in venture funding from a cadre of investors, including Tencent. According to a news report in The Wall Street Journal, the company announced the list of investors betting it can take on Apple and Samsung Electronics in the smartphone market, reported the paper.

Source: Tencent Increases Investments In AI, Payments | PYMNTS.com

Apple to spend big to ride our Content is King theme 

Apple to spend big to ride our Content is King theme 

 

Thus far Apple (AAPL) has stayed on the Content is King theme sidelines, but a combination of recent hire and a purported $1 billion check book to develop content change that. Granted, that $1 billion is well below what Netflix (NFLX) and Amazon (AMZN) are spending, but Apple has Apple TV – a solid platform that is bringing Amazon’s Prime Video and Wal-Mart’s (WMT) Vudu video service under its offering. As we like to say at Tematica, the only thing better than having one of our investment tailwinds behind a company’s back is having several of them.

Apple appears to be taking original content production very seriously. Building on significant talent hires, the Wall Street Journal writes Apple has readied a $1 billion budget to ‘procure and produce’ content over the next year.The report says the sum is about half what HBO spent on production last year.

Apple could launch up to ten new shows, with Apple SVP Eddy Cue said to have ambitions to offer shows that rival Game of Thrones.Try Amazon Prime 30-Day Free TrialApple’s initial rounds of content have not been runaway successes, with Planet of the Apps and Carpool Karaoke receiving bad-to-mild reviews from critics.

Reach of the shows has also been limited to users with Apple Music subscriptions.However, until recently, it didn’t really feel like Apple was giving much priority to original content efforts. With a large wallet and premiere talent leading the video programming division, it is likely that the quality of Apple’s in-development programming will also be higher.

Source: Apple to spend $1bn on original content and produce up to 10 new shows over the next year, according to report | 9to5Mac

Remaining Opportunistic as the Market Gets Cautious

Remaining Opportunistic as the Market Gets Cautious

After taking the prior week off on my sojourn to Singapore to present at INVESTFair 2017, I’m back. Take it from me, not only was the food fantastic as I put on several extra pounds, but Singapore is far ahead of us when it comes to our Cashless Consumption investing theme. Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about this on our Cocktail Investing podcast recently, but that level of activity keeps us bullish on USA Technology (USAT) shares on the Tematica Select List.

Earlier this week, we posted comments on Content is King player Disney (DIS)’s recent announcement it will look to shun Netflix (NFLX) and enter the streaming content market gun, rather than remaining a content bullet, and scaled further into shares of Food with Integrity company Amplify Snacks (BETR). We also sent over out latest high-level thoughts on the market in this week’s Monday Morning Kickoff – if you missed it, you can read it here.

As a quick recap since our last Tematica Investing, we’ve seen a far more cautious attitude enter the market following the back and forth with the U.S. and North Korea. At the same time, we’re also seeing some fatigue as even solid earnings beats like the one yesterday from Home Depot (HD) are not having the usual or expected stock price reaction. While we could toss it up to the fact that we’re entering the back half of August — one of the traditionally slower times of the year as people sneak it that last round of summer vacation — there could be something else going on.

Our view here at Tematica is investors are taking stock of not only the vector and velocity of the domestic economy, but also the growing political unease and are looking ahead to what’s coming down the barrel in September: the unveiling of President Trump’s tax reform, Congress dealing with the debt ceiling and potentially the start of the Fed’s balance sheet unwinding. All that during what has historically been one of the worst months for the domestic stock market. We’d add in that September is full of investor conferences, and after the usual August quiet, we suspect investors will be listening closely to these upcoming company presentations to fine tune back-half of the year expectations.

So, while we’ve seen a bit of a rebound in the market so far this week following last week’s sell off, we’re inclined to see the near-term waters remaining a tad choppy. Let’s remember, trading volumes tend to be a tad light this time of year and that can exacerbate the swings in stock prices. The net result is that we will tread carefully in the coming weeks, but we will still be opportunistic like we were with the buying of additional Amplify Snacks (BETR) shares yesterday, a move that reduced the overall cost basis on the Tematica Select List.

 

Checking in on July Retail Sales – Looks Great for Amazon, Alphabet, UPS and Costco

As mentioned in this week’s Monday Morning Kickoff, there is a modest amount of economic data to be had this week, including yesterday’s July Retail Sales Report. Overall it was a positive report with core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, up 0.5 percent. Moreover, the June decline of 0.1 percent was revised to an uptick of 0.1 percent. Digging into the July report, we found a pick-up in digital commerce, which likely reflects the Back to School shopping season as well as ongoing efforts by Amazon (AMZN) and others to grab consumer wallet share. Let’s remember that Amazon’s own would-be shopping holiday – Prime Day – fell in early July and likely was partly responsible for the strong rebound in digital shopping during the month.

Year over year, Nonstore retailers (Commerce Dept. speak for digital commerce sales) rose 11.5 percent in July, once again making the category the strongest performer. We see this as boding well for not only our Amazon shares but also for United Parcel Service (UPS) — those packages have to get to your front door somehow — as well as Alphabet (GOOGL) given its Google Shopping service as well as the company’s Search business.

Getting back to the July Retail Sales Report, most other categories were positive for the month, save for Sporting Goods, Electronics & Appliances and Department Stores. The month’s data helps put some understanding around Dick’s Sporting Goods (DKS) slashing its 2017 outlook, but we also think that company is poised to hit the headwind aspect of our Connected Society investing theme following Nike’s (NKE) recent linkage with Amazon. Said another way, we continue to see a bleak outlook for traditional brick & mortar retailers as consumer products and apparel companies, especially branded ones, embrace Amazon and other digital logistic businesses.

Finally, the July Retail Sales Report put some much-needed context around Costco Wholesale’s (COST) July sales report. As a reminder, Costco reported its July sales increased 6.0 percent in the US, and 6.2 percent across the entire geographic footprint. That compares to just a 2 percent increase for General Merchandise stores as well as Grocery vs. July 2016. Additionally, Costco continued to open up new warehouse locations during the month, reaching 736 locations compared to 729 at the end of April. Paired with the recent membership fee increase, this expanding footprint should be a positive impact for the all-important and high margin member fee revenue stream.

• Our price target on Amazon (AMZN) shares remains $1,150.
• Our price target on Alphabet (GOOGL) shares remains $1,050.
• Our price target on United Parcel Service (UPS) shares remains $122.
• Our price target on Costco Wholesale (COST) remains $190.

 

On Deck – Earnings from Applied Materials

Even though we are in the dog days of summer, we still have a few companies left to report their quarterly results. One of them is Applied Materials (AMAT), and that event happens later this week. Following a bullish report from competitor Lam Research (LRCX), we expect solid results to be had. Despite the move lower over the last several weeks, the outlook for semiconductor capital equipment remains bright given the expanding reach of chips into a variety of end markets as well as demand for next-generation memory and display solutions.

This includes the same currently capacity-constrained organic light emitting diode display market, which is seeing rising demand dynamics from the smartphone, TV, wearables and automotive industries. And yes, this same demand function that is benefitting the shares of Universal Display (OLED) on the Tematica Select List. On Applied’s earnings call we’ll be listening for equipment order as well as overall demand tone for this disruptive display technology to determine as best we can how many quarters

One final demand driver that should result in a positive quarter for AMAT — ramping capacity in China. The potential wrinkle with this is we’ll need to be mindful of exchange rates and the impact on the company’s business, but all in all, we suspect the company will deliver a solid quarter with an upbeat outlook.

On a side note, odds are Applied will discuss factors that are driving chip demand and therefore incremental demand for its semiconductor capital equipment. Likely subjects include data centers, the Internet of Things, the Connected Car and other markets. The one we’ll be listening to given the Tematica Select List position in AXT Inc. (AXTI) and Dycom (DY) will be the smartphone market — which is entering its seasonally strong part of the year — and any commentary on 5G network deployments. Other 5G commentary points to a pick-up in testing by Verizon Communications (VZ) and AT&T (T) as well as Apple being granted a license to test 5G wireless services. Both of these developments reinforce our bullish view on both AXT and DY shares on the Tematica Select List.

• Our price target on Applied Materials (AMAT) remains $55.
• Our price target on AXT Inc. (AMAT) remains $11.
• Our price target on Dycom Industries (DY) remains $115.

 

Housekeeping Items

There are no housekeeping items this week, other than to remind you to check TematicaResearch.com as we post more thematic and macro commentary in the coming days. And while the Cocktail Investing podcast is on hiatus until the last week of August, feel free to revisit some of the past episodes here.

 

 

 

The Tematica Take on Disney’s Pending New Streaming Service

The Tematica Take on Disney’s Pending New Streaming Service

We expect Disney shares are likely to trade sideways over the next several weeks as the market continues to digest the recently announced moves by the House of Mouse. We, on the other hand, continue to see our Content is King investment theme providing significant tailwinds to the business, and as such we’re suspending our stop-loss and will instead look to use further share weakness to improve our cost position.

 

Our Content is King investment theme has been getting plenty of attention over the last week. It started with Disney (DIS) announcing it would look to sever its relationship with Netflix (NFLX) as it plans to launch its own streaming services for ESPN and Disney content in 2018 and 2019, respectively. During the company’s 2Q 2017 earnings call, in which it discussed its better than expected quarterly results, it also offered some insight into its plans around this planned streaming service:

  • The new Disney content service will become the exclusive home in the U.S. for subscription video-on-demand viewing of the newest live action and animated movies from Disney and Pixar, beginning with the 2019 slate, which includes Toy Story 4, the sequel to Frozen, and The Lion King from Disney live-action, along with other highly-anticipated movies.
  • Disney will be making a substantial investment in original movies, original television series, and short form content for this platform, produced by our studio, Disney Interactive, and Disney Channel teams.
  • Subscribers will also have access to a vast collection of films and television content from our library.

As part of this move, Disney increased its ownership position in BAMTech, but came up short when it came to specifics about the launch of the planned service. You’ll notice what was not discussed, which was Disney’s Marvel and Lucasfilm properties, both of which are staples at Netflix, including several Marvel TV properties like Daredevil, Jessica Jones, and others. We chalk this up to Disney still figuring it out as it goes, but we expect more details to emerge in the coming months.

We understand Disney’s move for greater control over the distribution of its content as consumers increasingly shun cable and satellite bundles in favor of embracing the cutting the cord aspect of our Connected Society investing theme to watch what they want, where they want and when they want. Obviously, this move by Disney adds a layer of investment and uncertainty into the mix as it raises many questions at a time when the company is shy on details. That said, we know Disney is extremely careful in making its moves and usually has a well thought out, cohesive plan that leverages without sacrificing its content.

As we and others digest this initiative, with no major catalyst pending until the company resumes its run at the box office later this year, we expect Disney shares are likely to trade sideways over the next several weeks. We do suspect Disney will opportunistically use its share buyback program to its advantage in the coming weeks, which should help support the shares in the coming weeks. On the June quarter earnings call, Disney shared it had repurchased 22.3 million shares for $2.4 billion during the April-June 2017 period. Over the last nine months (let’s remember Disney is one of those “funny fiscals” that ends its business year in September), the company has repurchased 64.3 million shares for approximately $6.8 billion and shared it intends to end the current fiscal year repurchasing $9-$10 billion. Some quick sandbox math tells us that means Disney could buy back $2.2 to $3.2 billion worth of stock in the current quarter. Given the fall off in the shares of late, we’re inclined to think such activity will skew toward the higher end of the range.

In keeping with our Content is King theme, we recognize the vast library of characters and content under the Disney hood. As the company returns to a more normalized presence at the box office beginning in the December quarter and continuing through 2018, we’ll be patient with the shares.

We’ll be pulling the lens back on several Content is King announcements, including Netflix buying comic-book company MillarWorld as well as inking an exclusive deal with the creator Disney/ABC’s Scandal Shonda Rhimes, and Facebook (FB) angling to attack both the TV advertising spending stream and Alphabet’s (GOOGL) YouTube at the same time. We’ll have our thematic thoughts on what these moves and others mean for our Content is King theme on TematicaResearch.com shortly.

  • Our price target on DIS shares remains $125.
  • We will suspend our $100 stop loss at this time, as we’re inclined to use any incremental weakness to improve our cost basis in the position.

 

Using an Expectations to Share Price Disconnect to Scale into Amplify Shares

Using an Expectations to Share Price Disconnect to Scale into Amplify Shares

 

  • We are using the recent drop in Amplify Snacks (BETR) shares to scale into the position on the Tematica Select List at current levels, which will also serve to improve our cost basis.

  • Despite revising our price target lower to $10.50 from $11, the sharp move lower in the shares offers more than 43% upside.

 

As we noted in this morning’s Monday Morning Kickoff, both volatility and investor angst rose following the North Korea inspired political drama last week. Over the weekend, a calmer tone emerged and that has the domestic stock market moving rebounding this morning. Candidly, this could turn out to be a dead count bounce, and we continue to have several concerns – second half earnings and GDP expectations, the debut of Trump’s tax reform plan, debt ceiling discussions, and the Fed unwinding its balance sheet. We expect those and any potential re-kindling of the North Korea tension will roil the markets over the coming weeks.

As a reminder, we don’t buy the market. We let our thematic lens be our investing guide as we look for companies that benefit from multi-year tailwinds. While we are prudent investors, we are also opportunistic ones, and that has us scaling into shares of Food with Integrity investment theme company Amplify Snacks (BETR) this morning. Last week, BETR shares fell more than 20 percent following the company’s June quarter earnings report, and that brings the cumulative pullback in the shares to more than 30 percent since recently peaking just under $11 on July 24.

 

So what happened last week that BETR shares fell some 20 percent?

While the company beat on revenue for the quarter and delivered as expected EPS, the company trimmed its outlook. While revenue will continue to benefit from the consumer shift to better-for-you food, Amplify is kicking up its marketing budget to build its brand as it introduces new products, primarily across its Skinny Pop line. While Tematica’s Chief Investment Officer, Chris Versace, is biased toward the original flavor, we know Tematica’s President Chris Broussard is simply jonesing for a cheese flavored variety. He will soon get his wish alongside several new flavors.

Owing to that incremental spend, which we view as a positive as it looks to build awareness of both new and existing products here in the US and abroad, EPS expectations have moved lower for both this year and next. 2017 earnings now sit at 0.38 per share, down from the prior 0.42, and 2018 expectations now sit at 0.48 per share, down from 0.55. In our view, those EPS revisions do not warrant the more than 30 percent correction in the shares over the last several weeks.

While we cannot ignore those EPS revisions, and we’re not as we are trimming our BETR price target back to $10.50 from $11, we will use the mismatch between opportunity, earnings reset and move in the shares to scale into the position on the Tematica Select List. With the shares trading below $7.50 this morning, our revised price target still offers 42% upside from current levels, and that has us keeping our Buy rating intact.

Before we leave you to make this addition, we suspect some may be wondering if our core thesis on the shares has changed, and the answer would be “no.” We also continue to see Amplify as a potential acquisition by PepsiCo (PEP), Snyder’s Lance (LNCE), Post Holdings (POST), General Mills (GIS) or other snack food company.

 

 

 

 

 

WEEKLY ISSUE: A Company in Transition Can Be an Opportunity When the Time is Right

WEEKLY ISSUE: A Company in Transition Can Be an Opportunity When the Time is Right

In this Week’s Issue:

  • Updates on Tematica Select List Holdings
  • A Company in Transition Can Be an Opportunity When the Time is Right

 

We have one last major earnings hurrah in the short-term and that will hit on Thursday. From there, the pace of earnings should begin to slow, but like any lengthy meal, it means digestion will ensue. This time around the digestion phase will be the usual matching up of company reports and cross-referencing guidance, but with an eye to how realistic earnings expectations are for the back half of 2017.

In addition to doing our own work on this, as you read this Tematica’s Chief Investment Strategist is winging his way to Singapore to give a presentation on thematic investing. While the trip to and fro will be a lengthy one, including a long layover in Japan, we strongly suspect he’ll have a number of data points and insight to share in the next issue of Tematica Investing that will be published on Aug. 16. That’s right, while others may take off the last two weeks of August, we’ll be coming at you as we close the second month of 3Q 2017 and get ready for September.

Historically September has been one of the worst performing months for the market, and given our concerns about earnings expectations vs. the market’s valuation, the pending normalization of the Fed’s balance sheet and speed of the economy not to mention continued drama in DC and North Korea, we want to dress the investing table properly ahead of entering the last month of the quarter.

 

 

Updates on Tematica Select List Holdings

As we mentioned in this week’s Monday Morning Kickoff, we had a sea of more than 600 companies report their latest quarterly performance. Here are some quick highlights and corresponding actions for those Tematica Select List members that reported last week.

Following Facebook’s (FB) better-than-expected June quarter, in which advertising revenue rose 47 percent year-on-year and mobile revenue jumped 53 percent and the company trimmed back its operating expense guidance, we are boosting our price target on the shares to $200 from $165. At the current share price, we now see just over 15 percent upside to our new price target. Clearly, that is tempting. However, we’d look for the shares to settle following its earnings report and bullish commentary before revisiting the current rating on the shares.

  • We’ve increased our price target to $200 from $165 for Facebook (FB) shares, which offers 18 percent upside from current levels.
  • As we re-issue our Buy rating on FB shares, we would suggest subscribers let the currently over bought shares cool off following last week’s post earnings report climb. We see a compelling line closer to $160.

Also during the week, Amazon (AMZN) reported results that missed expectations, which we attribute to our warning over ramping expenses. Given its outlook, however, the shares finished the week down modestly. We acknowledge that quarter-to-quarter expenses can be tricky when it comes to Amazon, but there is no denying the winds that are at its back. As we enter the Back to School and soon to be upon us holiday shopping period we continue to see Amazon taking consumer wallet share. The fact that it continues to expand its offering while growing its very profitable Amazon Web Services is not lost on us.

  • Our price target on Amazon (AMZN) shares remains $1,150, which keeps the shares a Buy at current levels.
  • As we have said previously, AMZN shares are ones to own, not trade.

Buried inside the earnings report from MGM Resorts (MGM) last week was improved margin guidance, along with a strong event calendar, which in our view offsets the current disruption at its Monte Carlo facility. As a reminder, that facility is being rebranded to Park MGM. On the back of that call, Telsey Advisory Group not only reiterated its Outperform rating, but boosted its price target to $39. We’ll look to see if the near-term event calendar featuring the upcoming McGregor vs. Mayweather fight on Aug. 26 lives up to expectations, before adjusting our $37 price target for this Guilty Pleasure company.

When we added shares of AXT (AXTI) to the Tematica Select List, we knew the business would benefit from our increasingly Connected Society as well as new technologies that are part of our Disruptive Technology investing theme. Today we are boosting our price target to $11 from $9 on shares of this compound semiconductor substrate manufacturer following an upbeat 2Q 2107 earnings report. While the company’s EPS for the quarter was in-line with expectations, quarterly revenue was ahead of expectations and management confirmed the upbeat outlook by core customer Skyworks Solutions (SWKS) as it signaled continued volume gains are to be had in the coming quarters. We continue to see increasing demand for its substrates fueled by wireless and light emitting diode applications as well as the adoption of next generation technologies in data centers and other telecommunication applications. As volume improves, so to should margins and EPS generation as well.

  • We are boosting our price target on AXT Inc. (AXTI) shares to $11 from $9, which keeps a Buy rating intact.

Finally, while Applied Materials (AMAT) shares closed down 8 percent over the last several days, competitor Lam Research (LRCX) offered an upbeat view of semiconductor capital equipment demand on its 2Q 2017 earnings report. On the corresponding earnings call, Lam management shared several confirming data points behind our Applied thesis, including “Demand trends are robust, particularly in memory both in enterprise and consumer end markets. Applications such as machine learning and artificial intelligence are foundational to the next generation of technology innovation, and they are driving strong memory content growth for DRAM and NAND that offer attractive economics for our customers.”

One of the key differences between Applied and Lam is Applied’s position in display technology equipment that is benefitting from the ramp in organic light emitting diodes displays. Lam does not participate in that market and as good as its outlook is for semiconductor capital equipment, which bodes well for Applied, recent news that LG Display would invest several billion dollars to help Apple (AAPL) secure organic light emitting diode display capacity only benefits Applied.

  • We continue to be bullish on both Applied Materials (AMAT) as well as Universal Display (OLED) shares and our respective price targets remain $55 and $125.

A Company in Transition Can Be an Opportunity When the Time is Right

Often times companies that are in transition are ones that are put on the shelf that investors tend not to revisit. While that can be a good thing, there are times when it may not be and that’s the question today. Is Nokia (NOK), the former mobile phone market share leader that bungled the smartphone revolution worth taking another look at? Kind of like a bad relationship, most investors tend to walk away from a stock like a bad breakup, never looking back. But in this case, we think NOK, which was once a darling of our Connected Society investing theme a decade plus ago is showing signs it might be deserving of another chance as it morphs into Asset-lite company.

Let’s remember, Nokia shrewdly sold off its mobile phone business to Microsoft (MSFT) a few years ago fetching $7.2 billion in return. Soon thereafter Nokia sold its Here mapping and locations services business to an automotive industry consortium consisting of Audi, BMW Group and Daimler for $3.1 billion. So yes, the Nokia of today is very different than it was just a decade ago.

What’s left, is a company comprised of two businesses – Nokia Networks and Nokia Technologies. The Networks business is one that includes its mobile networks equipment — the hardware the carries all that cellular data — that is used by carriers across the globe, which are filling in some phase of expanding existing 3G or 4G LTE network coverage, building new 4G LTE networks (like in India) or prepping to test 5G networks. The Networks are a lumpy business as equipment demand peaks as a new technology is ramped and then fades as only incremental spending remains. We’ve seen this with 2G, 3G, and 4G networks, and odds are we will see this again with 5G. The Networks business also includes its services business as well as its IP/Optical Networks business, but the key mobile networks business accounts for

The issue will be one of timing – when does the ramp really begin? – and the competitive landscape, given the emergence of Chinese players like Huawei.
The simplest way to view Nokia Networks is it is one of the equipment vendors that Dycom Industries (DY) would use as it builds out a 4G, 5G or wirelines network for AT&T (T), Verizon (VZ) or Comcast (CMCSA). Its competitors include Ericsson (ERIC) as well as Alcatel Lucent (ALU), but also several Chinese vendors including Huawei and ZTE as well as Samsung.

While many may focus on that lumpy and competitive business, to us here at Tematica the far more interesting business is the company’s licensing arm called Nokia Technologies, a division that taps into our Asset-Lite investment theme that focuses on businesses that leverage intellectual property, patent portfolios and both licensing in and out models, outsourcing and similar business models. It’s an attractive investment theme because it requires little capital to operate, but often generates significant profits. Case in point, Nokia’s Technology division accounts for roughly 7 percent of overall revenue, but it generates more than one-third of the company’s overall operating profit.

Nokia Technology’s assets include the company’s vast mobile IP library, as well as developments in digital health and digital media. Given Nokia’s storied history in the phone market, many smartphone makers license the company’s patents for everything from display technology to antenna design. These licenses tend to span several years, and are extremely profitable. Moreover, Nokia is not resting on its laurels and licensing aging IP – during the first half of 2017, it spent EUR 1.9 billion ($2.2 billion) as it develops digital media, immersive virtual reality, and digital health technologies as well as builds out its mobile and wireline IP portfolio.

We’d note that Apple (AAPL) recently plunked down $2 billion to re-up its licensing agreement with Nokia, after engaging in a patent dispute when the last agreement lapsed. During 2Q 2017 Nokia also ironed out a licensing deal with Chinese smartphone vendor Xiaomi, and has its sight on not only other Chinese vendors, but also expanding its reach as connectivity moves beyond the smartphone and tablet to the home, car and Internet of Things. We see the expanded nature of Nokia’s latest licensing agreement with Apple as a potential harbinger of things to come. On the recent 2Q 2017 earnings call Nokia managements shared that, “instead of a simple patent licensing agreement, we have agreed on a more extensive business collaboration with Apple, providing potential for a meaningful uplift in our IP Routing, Optical Networks and Digital Health business units over time.” In our view, this makes Nokia a looming Disruptive Technology company mixed with a hefty dose of Connected Society.

Now here’s where things get interesting – while Nokia Technologies represented just 7 percent of overall sales in 2Q 2017, it was responsible for more than 60 percent of Nokia’s overall operating profit. Viewed from a different angle, its operating margins are more than 60 percent vs. just 8 percent or so for the Networks business. As one might suspect, the company is targeting a restructuring program to improve profitability at its Networks business, but from our perspective, the real story and the thematic tailwinds that make it attractive are the earnings leverage is tied to the Nokia Technologies business. Should Nokia begin to ink either more licensing deals with Chinese and other smartphone vendors or ones that allow it to expands its IP scope, we could see a meaningful lift in 2018 expectations. Current consensus expectations sit at EPS of 0.35 on revenue of $26.7 billion. That means NOK shares are trading at 18.3x that 2018 forecast, but the question in our mind is after two years with no EPS growth can Nokia grow actually grow its EPS by 35 percent in 2018.

As we’ve learned in the past with InterDigital (IDCC) and Qualcomm (QCOM)sometimes these licensing wins can be lumpy, taking far more time than one might expect. From time to time, it may include legal action as well, which can lead to a rise in legal fees in the short term. Given the company’s net cash position of roughly EUR 4.0 billion ($4.7 billion), we’re not too concerned about its ability to protect itself while continuing to invest in R&D or pay an annual special dividend each year.

As we look for greater near-term clarity at Nokia Technologies and as management looks to restructure Nokia Networks as well as the current valuation, rather than jump on Nokia shares trading at $6.58 at the open this morning as we head into the dog days of summer, we’re placing them onto the Tematica Contender List and we’ll watch for future IP licensing progress or for the shares at about 15% less, at the $5.50 level.

One other item… In an interesting development, a few years ago Microsoft has sold the Nokia brand in two parts to HMD and Foxconn. HMD is a company comprised of former Nokia employees in Finland and through Nokia Technologies it has licensed the sole use of the Nokia brand on mobile phones and tablets worldwide for the next decade, as well as key cellular patents. Meanwhile, Foxconn acquired the manufacturing, distribution and sales arms of Microsoft-Nokia and has also agreed to build the new Nokia phone for HMD. To us, this could be a wild card to watch, but the question will be whether or not they make the move from feature phone to smartphone and have any success? Only time will tell.

 

 

 

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

In this Week’s Issue:

  • Thematic Data Points Revealed in Earnings Thus Far
  • What We Expect from Thematic Poster Child Company Amazon
  • Shifting USAT and BETR shares to Hold from Buy
  • Some Quick Tematica Select List Hits on AXTI, MGM, OLED, AMAT and DY

 

With all many plates spinning on sticks this week, thus far we’ve seen a mixed reaction from investors on the most recent developments coming out of Washington, D.C. amid the Affordable Care Act debate and the onslaught of earnings report. As those many details are digested, the market is also weighing what the Fed will say this week when it comes to the tone of the economy as it concludes its latest monetary policy meeting.

As we shared in this week’s Monday Morning Kickoff, we see a low to no probability of the Fed boosting rates near-term, especially given the pending September unwinding of its balance sheet – something we’ve never experienced before. Given that Fed Chairwoman probably doesn’t want to be the one to send the domestic economy into a tailspin, we strongly suspect she and the rest of the Fed heads will stand pat as they offer clues for what is to be had in the coming weeks.

 

Thematic Data Points Revealed in Earnings Thus Far

As we parse through the onslaught of quarterly earnings reports coming at us this week, we continue to find confirming data points for our investing themes. We saw those in spades yesterday as we reviewed Alphabet’s (GOOGL) 2Q 2017 earnings report. If you missed that commentary, you can find it here, but the skinny is Alphabet continues to ride the tailwinds of the Connected Society investment theme and the shares are a core holding on the Tematica Select List.

We expect the same to be true when Facebook (FB) reports its quarterly results after tonight’s market close. Over the last several quarters, Facebook has been incrementally expanding its monetization efforts across all its various platforms and we see more benefits ahead. Just last week the company announced it would be expanding its advertising platform to the company’s Messenger app for smartphones. We expect more details on this, as well as its pending foray into subscription services with newspapers, magazines, and other publishers during the company’s 2Q 2017 earnings conference call. Also on that conference call and earnings release, we’ll be scrutinizing subscriber metrics as well as average revenue per user figures. One of the keys to Facebook’s continued revenue and profit growth will be monetizing non-US users in the coming quarters. Consensus expectations for 2Q 2017 sit at EPS of $1.12 on revenue of $9.2 billion.

  • Even though FB shares have moved past our formal $160 price target, we’ll be putting it under the microscope to determine potential upside to be had based on 2Q 2017 results and the company’s outlook beyond the first half of 2017.
  • Those revisions may not lead to a table pounding “buy” conclusion, but Facebook’s position in our Connected Society investing theme, along with its growing monetization efforts, keep FB shares as a must own for the foreseeable future.

 

What We Expect from Thematic Poster Child Company Amazon

Also later this week, we’ll be getting earnings from the poster child company when it comes to thematic investing – Amazon (AMZN). If you missed our latest Thematic Signals posting that explains this, you can find it here.

Where do we begin with Amazon this week? First, there was the move by Sears (SHLD) to partner with Amazon with regard to selling Kenmore appliances online (including the smart-home ones that include Amazon Alexa). Then there was Amazon debuting its Amazon Pay Places feature, which allows users to utilize their Amazon account like a mobile wallet for a real world version of one-click shopping. Or perhaps you saw the launching of Spark, which allows Prime members to shop a feed of social media-inspired product suggestions. The key takeaway is Amazon continues to flex its muscles, many of which have solid thematic drivers behind them, and it is doing so at a blistering pace. As Tematica Chief Macro Strategy Lenore Hawkins chimed in on a recent episode of Cocktail Investing, “how much coffee does Jeff Bezos drink?”

While we are on the subject of Amazon, late last week, the Federal Trade Commission announced it is investigating Amazon’s discounting policies following a Consumer Watchdog complaint. Candidly, as Amazon continues to expand its footprint, we expect more of such complaints and suspect that will serve only as a distraction. Moreover, given its balance sheet, should any fines be awarded it has ample funds to comply. More sizzle than steak, as it were.

We do NOT expect Amazon to say much with regard to this FTC non-event event when it reports its earnings tomorrow night. Consensus expectations have the company delivering EPS of $1.42 on revenue of $37.18 billion.

We would call out one key concerns ahead of that quarterly report and usually tight-lipped conference call — it seems investors think Amazon can do no wrong and that mindset can lead to excessive whisper expectations. There we said it.

Our concern in the short term remains the potential for Wall Street to have underestimated Amazon’s investment spending in the near term. As we saw above, it has a number of initiatives under way, and given the accelerating shift to digital commerce and potential partnership to be had on top of those with Nike (NKE) and Sears, Amazon may step up its investment spending ahead of the year-end holiday shopping season, thus cutting into its EPS projections.

If we are right, we could see the shares have a cool post-earnings reception. From our perspective, we see that spending as a long-term investment to grow its services and geographic footprint. Any meaningful pullback in the stock would be an opportunity for investors to increase their foothold in the stock in our view.

  • We will remain patient investors with Amazon (AMZN), especially as we enter the holiday spending filled second-half of 2017.
  • Our price target remains $1,150.

 

Shifting USAT and BETR shares to Hold from Buy

Over the last few weeks, shares of Food with Integrity company Amplify Snacks (BETR) and Cashless Consumption play USA Technologies (USAT) have been melting higher.  Amplify Snacks, on the back of merger-and-acquisition interest focused on the “food that is good for you” space, and USAT, following its recent stock offering and bullish transaction volume commentary from Visa (V), JP Morgan (JPM) and others so far this earning season.

  • Those moves either have put BETR and USAT shares over and above or very close to our price targets.
  • We will be mindful of these targets ahead of respective earnings reports, but for now, we are downshifting them to Hold from Buy on the Tematica Select List.

And as a reminder, our Hold rating, it is literally just that, a recommendation for those that own the shares to hold them for the time being. For subscribers who missed these recommendations, we’d be more inclined to revisit this BETR shares below $9.50 given our $11 price target. With USAT shares and our $6 target, we are more inclined to revisit USAT shares at lower levels, and in this case, that means closer to $5.

As we move through this earnings season over the next two weeks, we continue to think we will see opportunities emerge that allow us to capture thematically well-positioned companies at better prices.

 

Some Quick Tematica Select List Hits

 

AXT Inc. (AXTI)

Following an upbeat report for key customer Skyworks (SWKS) last week, we expect solid results this week from Disruptive Technology company AXT Inc. (AXTI). On its earnings call, Skyworks shared it is still in the early innings of a data explosion that is expected to grow sevenfold over the 2016-2021 period, which should benefit wireless semiconductor demand. Connecting the dots, this bodes extremely well for AXT’s substrate business.

  • Consensus expectations for AXTI sit at EPS of $0.05 on revenue of $22.55 million
  • Our price target remains $9 for AXT shares.

 

MGM Resorts International (MGM)

We’re happy to share that Guilty Pleasure company MGM Resorts International (MGM) will be added to the S&P 500 when that index rebalances later today. That should spur incremental buying among mutual funds as well as exchange traded funds that are based on that index.

Getting back to earnings and expectations, the consensus for MGM is EPS of 0.30 on revenue of $2.67 billion. Data of late for gaming in both Las Vegas and Macau have been quite favorable and we view the company’s recent initiation of a quarterly dividend as underscoring management’s confidence in the business over the coming quarters.

  • Given favorable prospects over the medium term, we would look to use any pronounced weakness in MGM shares following the company’s earnings report to scale further into the shares.
  • Our price target remains $37.

 

Universal Display (OLED)

Many investors are focused on Apple’s (AAPL) adoption of organic light emitting diode (OLED) displays for its next iteration of the iPhone, but as subscribers know there is far greater adoption across other smartphone vendors as well as those for TVs, wearables and other applications. That adoption, which is resulting in companies that had previously invested in liquid crystal display technologies shifting their investments to organic light emitting diodes ones.

We’ve seen the ramping demand for OLED equipment at Applied Materials (AMAT), and this week we saw another layer added to the OLED demand/capacity profile when LG Display shared its plan to invest $13.5 billion to boost output of OLED screens over the next three years. Now let’s add that context we always talk about — the investment is roughly 25 percent more than LG Display’s annual capital spending, which likely means it intends to be an aggressive force in the OLED display market. Given that LG is one of Universal’s key customers, with the other being the OLED industry leader Samsung, we see LG’s upsized commitment to OLEDs as a strong tailwind for Universal’s chemical and high margin IP licensing business.

  • Our formal price target of $125 for Universal Display (OLED) shares is under review with a bias to moving it upwards.
  • The company will report its 2Q 2017 results on August 3 and we will adjust that target after that announcement.

 

 

Applied Materials (AMAT)            

The next catalysts for Applied Materials (AMAT) will be earnings from competitor Lam Research (LRCX) later today and Intel (INTC) tomorrow. Inside Lam’s results, we’ll be watching new orders, as well as backlog levels on both a product and geographic basis. In particular, we’ll look for confirmation of data coming out of the recent SemiCon West industry event that pointed to solid memory demand, which bodes well for additional semi-cap equipment demand.

With Intel’s results, we’ll be paying close attention to its capital spending plans for the back half of 2017. Also too, as we mentioned with Universal Display above, LG’s plan to spend $13.5 billion over the next 3 years to ramp its organic light emitting diode capacity bodes rather for Applied’s order book and back log levels over the coming quarters.

  • Our price target on AMAT shares remains $55, which offers ample upside from current levels.

 

 

Dycom Industries (DY)

This week and next will see several of Dycom’s key customers report their earnings, including AT&T (T), Verizon (VZ) and Comcast (CMCSA). Inside those reports, we’ll be looking at not only overall capital spending levels, but in particular, those targeted to mobile and wireline network capacity additions.

Given the continued adoption of streaming services, audio as well as video, we see commentary that networks capacity levels are running at exorbitantly high capacity utilization levels as being very good for Dycom. While we don’t expect any specifics on 5G timetables, we do expect to hear more about testing and beta launches. As Dycom’s key customers issue their quarterly reports, we’ll have much more to say on what it means for DY shares.

  • We continue to rate Dycom (DY) shares a Buy with a $115 price target.

 

 

 

Alphabet Continues to Ride the Connected Society Tailwind

Alphabet Continues to Ride the Connected Society Tailwind

Last night Alphabet (GOOGL) reported June quarter earnings that bested expectations; however, the shares traded off last night in aftermarket trading following managements comments that costs are slated to rise faster than revenue near-term as mobile becomes a greater portion of its traffic and searches.

That tradeoff is continuing today, with the shares down almost 3 percent, as investors and analysts rejigger their EPS expectations. Making it somewhat murky was the fact that Alphabet management was tight-lipped about margin prospects in the coming quarters, and we suspect that means Wall Street could cut deeper than needed.

From our perspective, Alphabet’s core businesses – search, advertising, YouTube, and shopping – all stand to benefit from the ongoing if not accelerating shift toward a digital world, which as you know, is the thesis behind our Connected Society investment theme. ( Click here to download a full thematic glossary we recently put together detailing all 17 of our themes)

As we have said previously, GOOGL shares are ones to own, not trade, even as this pullback occurs.

  • Therefore GOOGL shares, which benefit from tailwinds from our Asset-Lite Business Model and the Connected Society investing themes, remain on the Tematica Select List with a $1,050 price target.

 

Let’s Look Beneath the Headlines of GOOGL Earnings

Looking deeper at Alphabet’s 2Q 2017 EPS, it reported $5.01 per share, $0.58 better than the consensus of $4.43. Excluding the $2.7 billion antitrust fine, EPS would have destroyed expectations and been $8.90 per share. Stepping back, during the quarter the company continued to deliver double-digit growth at its core businesses and despite the $2.7 billion fine to the European Union, still managed to crush earnings expectations.

Quarterly revenue at Alphabet, rose 21 percent to $26.01 billion, beating analysts’ average estimate of $25.65 billion with aggregate paid clicks up 52 percent year over year and 12 percent vs. the prior quarter. Paid clicks, where an advertiser pays only if a user clicks on ads, handily beat the expected 35 percent increase among the Wall Street analyst community for 2Q 2017. Google’s ad revenue, which accounts for a lion’s share of its business, rose 18.4 percent to $22.67 billion benefitting from advertising on both mobile and You Tube. With advertisers still shifting toward digital vs. other advertising modalities, research firm eMarketer sees Alphabets’ digital ad revenue jumping nearly 18 percent for full year 2017 to $73.5 billion. We’d note given the launch of YouTube TV that is expanding its available markets, plus the overall shift from TV advertising to digital platforms not only could eMarketer’s forecast be conservative, we expect share gains to continue past 2017.

 

Now for what has the shares trading off today

Even though the average cost per click fell 23 percent year over year and the company continues to make progress on reducing costs associated with its “Other Bets” segment, its costs for the quarter grew faster than revenue. This led to a modest decline in margins compared to expectations for the quarter. One-quarter does not make a trend, and we’ll continue to watch these line item as we head into the back half of 2017.

The reaction to all of this has led to a variety of price target changes across Wall Street, some up and some down. Looking at the situation through our thematic investment lends:

  • We continue to have a $1,050 price target on GOOGL shares, which offers just under 10 percent upside from current levels.
  • Should the shares retreat further, it will be tempting to scale into the position, but we’d suggest subscribers look for an even more compelling risk-to-reward trade-off near or below $900, given the potential for other EU fines and potential changes to be made to the company’s business to comply with the EU’s recent ruling. We expect more clarity on both in the coming months.

 

 

Amazon Continues to Grab More and More Consumer Wallet Share

Amazon Continues to Grab More and More Consumer Wallet Share

Last week we received the disappointing June Retail Sales report, which pointed to another step down in GDP expectations for the second quarter as well as the ongoing pain for brick & mortar retailers, especially department stores like Macy’s (M), JC Penney (JCP) and the like.

Digging into the June retail sales report, we noticed month-over-month declines almost across the board, but one of the larger declines was in… you guessed it.. department stores, which fell 3.9 percent year over year. By comparison, Nonstore retailers (code for e-tailers), like Amazon (AMZN), rose 9.7 percent year over year.

We’d also note the June retail sales report caps the second-quarter data and, in tallying the three months, nonstore retailer sales rose more than 10 percent year over year. On the other hand department stores fell more than 3 percent, while the sporting goods, hobby, book and music store category dropped nearly 6 percent year over year. Keep in mind that Nike (NKE) only recently partnered with Amazon to leverage its second to none logistics as Nike looks to reduce its reliance on third party retailers such as Foot Locker (FL) and grow its higher margin Direct to Consumer business. Yet another reason to expect declining mall traffic in the coming months especially if more branded apparel companies look to partner with Amazon… and yes, we expect that to happen.

 

 

This week, Amazon sent more than a flare across the bow of newly public meal kit company Blue Apron (APRN) and took one step deeper into expanding its food focused efforts. As they’ve become public, recent trademark filings reveal Amazon is looking to attack the growing meal kit business and has trademarked “We do the prep. You be the chef,” “We prep. You cook” and “No-line meal kits.”

Looking into the filings, the described service offering tied to these trademarks is “Prepared food kits composed of meat, poultry, fish, seafood, fruit and/or and vegetables and also including sauces or seasonings, ready for cooking and assembly as a meal; Frozen, prepared, and packaged meals consisting of meat, poultry, fish, seafood, fruit and/or vegetables; fruit salads and vegetable salads; soups and preparations for making soups.”

As we said above, it sure looks like Amazon is looking to leverage its growing presence in food, and our Food with Integrity investing theme, to capitalize on the growing meal kit business that led Blue Apron to go public. Looking back over the last few years, we see this as a natural extension of its food efforts that began in 2013 with the launch of Amazon Fresh for groceries followed by Amazon Restaurants for restaurant delivery in 2014. Of course, the pending acquisition of Whole Foods (WFM) is the key ingredient (see what we did there) to rounding out its position in the meal kit business and tap the $800 billion grocery opportunity.

This announcement, paired with others that include Amazon’s move into the apparel industry, bolsters its already strong position for the quarters to come. Now for a word of caution – of late it seems that Amazon can do no wrong and in our view, this sets up pretty high expectations for the company’s 2Q 2017 earnings and the outlook for the second half of 2017, which includes Back to School, and holiday shopping.

One of the few places the herd gets tripped up with Amazon is on the cost side of the equation, particularly when it comes to investing for future growth. Given the number of initiatives Amazon has in place, we think there is a meaningful probability that Amazon boosts its investment spending near-term for these newer initiatives as it has done in the past when it reports its quarterly results on July 27. If we’re right, it could lead to a pullback in the shares especially since Amazon tends to be rather tight lipped when it comes to details on its earnings conference calls. We would look to scale into AMZN shares between $820-$870, roughly a 15-20 percent drop from current levels, which tends to be the range that high profile stocks like Amazon get hit if they come up short on earnings or guidance.

  • We continue to see Amazon as a long-term wallet share gainer as it continues to expand its umbrella of service offerings and geographic footprint, while benefitting from the adoption of its high margin cloud business.
  • Our price target remains $1,150.