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Auto Insurers to feel the pain of Connected Society and Asset-Lite Consumers

Auto Insurers to feel the pain of Connected Society and Asset-Lite Consumers

When confronted with a structural change, like the one posed by the combination of self-driving auto technology and the psychographic shift toward fewer people owning cars instead opting for  Uber, Lyft,  Zipcar and the like most tend to contemplate the first derivative. Often times though the ripple effect to be had is far larger and in this case if fewer cars are being sold, it means fewer auto insurance policies at State Auto Financial Corp., Geico and Progressive are likely to be written and paid for.

Each of these trends could dent the global auto insurance industry. As they begin to converge, the damage could be irreparable. In mature markets, auto insurance could drop by as much as 80% by 2040, according to a recent Blue Paper report from Morgan Stanley Research and Boston Consulting Group (BCG), “Motor Insurance 2.0.”

The report, which includes findings from a proprietary global consumer survey and market modelling, looks at how transportation is changing, how the insurance industry is trying to reposition, and what it mean for investors, related sectors, policy makers, and consumers.

Source: Are Auto Insurers on Road to Nowhere? | Morgan Stanley

How Netflix could hurt the NFL – Business Insider

How Netflix could hurt the NFL – Business Insider

The NFL had a panic-filled season this year, with regards to viewership. In the the first chunk of the season, the NFL saw primetime viewership dive by double digits relative to last year. The league officially blamed the presidential election, but also said it could work on improving things like how much advertising was being served to viewers.One reason might be that the NFL is worried the popularity of streaming services like Netflix, which has a slick interface, tons of portability, and no ads, could push the league out of step with viewer habits.

Source: How Netflix could hurt the NFL – Business Insider

 

Over the past several months the NFL went from denying there was an issue with its ratings, to admitting there was a “dip” in ratings but it was because of the presidential election, to now blaming Netflix (NFLX).

Whew!

This, we guess, would be good news for Netflix to be considered the NFL killer, but the reality is the issue is much, much more widespread and complicated.

What we see is the NFL sitting right in the crosshairs of the emergence of the Connected Society and Content is King investment themes, and in both cases sitting at the wrong end of the equation. From the Content is King end, the reality is the NFL isn’t providing content that is all that great, and many would argue, it’s providing too much content!  The NFL used to own Sundays and Monday nights. Now it’s on Sunday afternoon, Sunday night, Monday night, Thursday night and then in December it’s on Saturday nights too — nice of them to leave Saturdays for College Football and Friday night’s for high school games!

Of course, our own belief in the problem with the NFL is that fans are no longer fans of teams, but fans of players, and they are the fans of those players on their fantasy football teams. That’s good news for the service providers in the fantasy football space, Yahoo (YHOO) being one of them, but that doesn’t help the networks shelling out the dollars for the billion dollar rights contracts for the NFL.

On the Connected Society aspect, viewers no longer have to sit and watch a 3-hour game — a game with replays and challenges that take forever and having to listen to announcers drone on and one about meaningless aspects of the game or just seem to enjoy listening to themselves talk (we’re talking to you Phil Simms!). They can see all the replays they want on Twitter, get the blow-by-blow by other fans across social networks and then watch the highlights on NFL.com. And then there is the fact that with chord-cutters without network or cable TV in their household, they are flocking to the bars to watch the game they want. Again, good news for the folks at Twitter (TWTR) who very much need some good news these days, but doesn’t help.

Is the NFL past its peak? Doubtful.

But it is very, very likely that we’re going to see a transformation in the viewing experience of all sports, in particular the NFL, given how much money is involved. We wouldn’t count out the current rights holders (Disney’s ESPN, Comcast’s NBC, and Fox), but it is likely that other players are going to emerge and take a major role in the broadcasting of games.

 

JetBlue provides the Connected Society investment theme with a strong tailwind 

JetBlue provides the Connected Society investment theme with a strong tailwind 

JetBlue has become the first airline to provide free, high-speed Wi-Fi on all flights.The airline announced Wednesday that it will offer its “Fly-Fi” aboard every aircraft—from the departure gate to the arrival gate—so that customers can stay connected without having to wait for the aircraft to ascend beyond 10,000 feet. With Fly-Fi, passengers can watch free movies, stream content from Amazon Video, browse the web, and use messaging apps.

Source: You Can Now Enjoy Free Wi-Fi on Every JetBlue Flight | Travel + Leisure

 

WiFi in the skies isn’t anything new — it was first introduced in 2007 by AirCell and it’s Go-Go Service with American Airlines and Virgin American. The biggest concern with the service (beyond battery life of the laptop!) was capacity and as such access prices were set by airlines at a point that would hopefully limit passengers from overwhelming the network on the plane, making it unusable.

Flash forward to earlier this week, and JetBlue’s announcement that it would provide free Wifi on all flights to all passengers. Remember, this is the airline that changed in the in-flight entertainment experience offering in-seat DirecTV service for free. Gone were the days of having to watch the one bad movie the airline chose to play followed by sitcom reruns. Might not seem like much, but a 2-hour tarmac delay once on a JetBlue flight from Washington, DC to Boston   made us instant fans!

The move by JetBlue in our view is a reaction to the realities of the Connected Society and Content is King thematics. Gone are the days where passengers watch live TV. Instead, they wish to stream the content they want and binge-watch the hottest program. What could make a flight go by faster than a marathon viewing of Amazon’s new series Grand Tour!

We can’t speak to the economics of this move to the airline itself — we’ll leave that to folks like Frank Holmes, CEO of U.S. Funds and issuer of the JETS Exchange Traded Fund — but in our view it’s good news for content providers, device makers and other players in our Connected Society investment theme as well as Content in King.

Apple to get into the Content is King theme

Apple to get into the Content is King theme

Apple and the iPhone have been at the forefront of our Connected Society investment theme and Apple Pay lands the company in our Cashless Consumption theme as well. For a long time, Apple has held off creating original content preferring instead to be a platform via iTunes and its app ecosystem for others to distribute their content (Netflix on iPads, iPhones and Apple TV as an example). With the battle for the device consumer heating up, Apple is taking a page out of Content is King companies Disney (DIS) and Comcast (CMCSA) and moving into content to shore up its competitive position. We’ve seen Netflix do this and Amazon (AMZN) is charging ahead as well. From a thematic sense, if Apple can get the programming right, three thematic tailwinds are better than one or two.

Apple Inc. is planning to build a significant new business in original television shows and movies, according to people familiar with the matter, a move that could make it a bigger player in Hollywood and offset slowing sales of iPhones and iPads.These people said the programming would be available to subscribers of Apple’s $10-a-month streaming-music service, which has struggled to catch up to the larger Spotify AB. Apple Music already includes a limited number of documentary-style segments on musicians, but nothing like the premium programming it is now seeking.

Source: Apple Sets Its Sights on Hollywood With Plans for Original Content – WSJ

Alibaba to invest big time in entertainment taking on Netflix and Amazon

Alibaba to invest big time in entertainment taking on Netflix and Amazon

2016 was a year of marked investment in content from the likes of Netflix, Amazon and Alphabet. But there are more companies entering the fray including Facebook and even Apple. Given the global thirst for content, which both Amazon and Netflix are aiming to cater to, it comes as little surprise that Alibaba is looking to invest in Content, which we all know is King. If there is any question about that, we’d point you to the US box office and Rogue One: A Star Wars Story.

Alibaba Digital Media and Entertainment Group, the entertainment affiliate of Alibaba, plans to invest more than 50 billion yuan ($7.2 billion) over the next three years, the affiliate’s chief executive said.

In an internal email seen by Reuters and confirmed by an Alibaba group spokeswoman, the affiliate’s new CEO Yu Yongfu pledged to invest in content, saying “he didn’t come to play.”

Alibaba’s entertainment business underwent a major reorganisation in October, marking a total consolidation of the company’s media assets.

Source: Alibaba entertainment affiliate to invest over $7 billion over next 3 years

Why the On-Demand Economy Doesn’t Make the Thematic Cut

Why the On-Demand Economy Doesn’t Make the Thematic Cut

We keep hearing that thematic investing is gaining significant popularity in investing circles, especially when it comes to Exchange Traded Funds (ETFs). For more than a decade, we’ve viewed the markets and economy through a thematic lens and have developed more than a dozen of our own investing themes that focus on several evolving landscapes. As such, we have some thoughts on this that build on chapters 4-8 in our book Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns

One of the dangers that we’ve seen others make when attempting to look at the world thematically as we do, is that they often confuse a trend — or a “flash in the pan”  — for a sustainable shift that forces companies to respond. Examples include ETFs that invest solely in smartphones, social media or battery technologies. Aside from the question of whether there are enough companies poised to benefit from the thematic tailwind to power an ETF or other bundled security around the trend, the reality is that those are outcomes — smartphones, drones and battery technologies — are beneficiaries of the thematic shift, not the shift itself.

At Tematica Research, we have talked with several firms that are interested in incorporating Environmental, Social and Governance — or ESG — factors as part of their investment strategy. Some even have expressed the interest in developing an ETF based entirely on an ESG strategy alone. We see the merits of such an endeavor from a marketing aspect and can certainly understand the desire among socially conscious investors to ferret out companies that have adopted that strategy. But in our view and ESG strategy hacks a sustainable differentiator given that more and more companies are complying. In other words, if everyone is doing it, it’s not a differentiating theme that generates a competitive advantage that will provide investors with a significant beta from the market.

But there is a larger issue. A company’s compliance with an ESG movement is not likely to alter the long-term demand dynamics of an industry or company, even if certain businesses enjoy a short-term surge in revenues or increased investor interest based on a sense of goodwill.

For example, does the fact that Alphabet (GOOGL) targets using 100 percent renewable energy by 2018 alter the playing field or improve the competitive advantage of its core search and advertising business? Does it do either of those for YouTube?

No and no.

At the risk of offending those sensitive about their fitness acumen, it makes as much sense as investing in an ETF that only invests in companies with CEOs who wear fitness trackers. Make no mistake, our own Tematica Research Chief Macro Strategist Lenore Hawkins, a fitness tracker aficionado herself, would love to see more fitness trackers across the corporate landscape, but an ETF based on such a strategy means investing in companies across different industries with no cohesive tailwind powering their businesses, likely facing very different market forces that overshadow the impact of the one thing they have in common. To us, that misses one of the key tenants of thematic investing.

The result is a trend that is likely to be medium-lived, if not short lived. Said another way, it looks to us to be more like an investing fad, rather than a pronounced thematic driven shift that has legs.

Subscribers to our Tematica Investing newsletter know we are constantly turning over data points, looking for confirmation for our thematic lens, as well as early warning flags that a tailwind might be fading or worse, turning into a headwind. As we collect those data points, we mine the observations that bubble up to our frontal lobes and at times, ask if perhaps we have a new investing theme on our hands. Sometimes the answer is yes, but more often than not, the answer comes up “no”.

Now you’re in for a treat! Some behind the scenes action if you will on how we think about new themes and why one may not make the cut…

 

The On-Demand Economy:  Enough to become a new investing theme?

 Recently we received a question from a newsletter subscriber asking if the number of “on-demand” services and business emerging were enough to substantiate the addition of a new investment theme to go along with the other 17 themes we currently track.

By on-demand, we’re talking about those services where you can rent a car, (Lyft or Uber) or find private lodging (AirBnB) with the click of a button for only the time you need it rather than rent an apartment or studio for a week or month. It also refers to the many services that will deliver all the ingredients you need to prepare a gourmet meal in your own kitchen, such as the popular service Blue Apron or HelloFresh.

It was an interesting question because we have been debating this at Tematica Research for quite some time. We’re more than fans of On Demand music and streaming video services like those offered by Amazon (AMZN), Netflix (NFLX), Pandora (P), Spotify and Apple (AAPL).  Ultimately, we came to the conclusion that the real driver behind the on-demand economy is businesses stepping into fill the void created by a combination of multiple themes, rather than a new theme in of itself. Here’s what we mean . . .

Take the meal kit delivery services like Blue Apron, what’s driving the popularity of this service? We would argue that it’s not the fact that people like seeing their UPS driver more. Rather it is the result of underlying movement towards more healthy and natural foods that omit chemicals and preservatives — something we have discussed as the driver behind our Foods with Integrity theme — on top of a bigger Asset Light investment theme in which consumers and businesses outsource services, rather than accumulating assets and then performing the service themselves. The on-demand component of Blue Apron is not driving the theme, but is a beneficiary of what we call the thematic tailwind.

The challenge with the shift towards healthier cooking, that sits within our Foods with Integrity thematic, is the amount of work, and in many cases equipment, it takes to cook such foods — the shopping, the measuring, the cutting, special cooking utensils and preparation time, not to mention the cost. Recognizing this pain point, Blue Apron saw opportunity and consumers have flocked to it. As we see it, the meal delivery services are an enabler that addresses a pain point associated with our Foods with Integrity theme, rather than an independent theme unto itself.

There is also a clear element of the Connected Society investment theme behind these services, given how customers order the ingredients to prepare the meals – via an app or online – as well as our Cashless Consumption theme, given the method of payment does not involve cash or check and Asset Light whereby consumers pay for the end product, rather than investing in assets so that they can make it themselves. So that we are clear, the primary theme at play here is Foods with Integrity, but we love to see the added oomph when more than one theme is involved.

 

 Let’s look at Uber, the on-demand private taxi service. 

We’re big users of the service, particularly when traveling, and we love the ease of use. To us, while the service offered by Uber is very much On-Demand, from the customer perspective, it fits into our Asset Light theme, as it removes the need to own a car. If you think about, what’s?  the amount of time you spend using your car compared to the amount of time it spends parked at home, at work or in a parking lot? The monthly cost to own and maintain that vehicle vs. the actual number of hours it is used offers a convincing argument to embrace an Asset Light alternative like Uber.

We also like the payment experience — or the lack of an experience. We’re talking about having the ride fee automatically charged. No cash, no credit card swiping or inserting, no awkward “how much do I tip?” moments. It’s our Cashless Consumption theme in all of its glory, walking hand-in-hand with Asset Light — and the only thing better than a strong thematic tailwind behind a company is two!

The biggest users of the Uber and Lyft services, and the ones driving the firms’ valuations to stratospheric levels, are the Millennials who are opting to just “Uber “ around town — it’s become a verb — or use a car-sharing service like a ZipCar (ZIP) or the like.

Sure, Millennials have the reputation of being a more thrifty, frugal group compared to previous generations. But we have to wonder is it them being thrifty or just coming to grips with reality?

With crushing costs of college and student loans, as well as stagnant wage growth, many young workers are forced to cobble together part-time and contractor jobs rather than enjoying a full-time salaried position, so what choice do they have? Why buy a car and pay for it to sit there 95% of the time when you can just pay for it when you need it?

We call that the Cash-strapped Consumer theme meets Asset Light, and many businesses have also stepped in to service this rising demand for what has become known as the “sharing economy.”

 

Finally, what is the underlying function of all these on-demand services?

As we mentioned earlier, it’s the ability to connect and customize the services that consumers want through a smartphone app or desktop website, or from our thematic perspective, the Connected Society.

One of the key words in the previous sentence was “service.” According to data published by the Bureau of Economic Analysis in December 2015 and the World Bank, the service sector accounted for 78 percent of U.S. private-sector GDP in 2014 and service sector jobs made up more than 76 percent of U.S. private-sector employment in 2014 up from 72.7% in 2004. Since then, we’ve seen several thematic tailwinds ranging from Connected Society and Cash-strapped Consumer to Asset Light and Disruptive Technologies to Foods with Integrity that either on their own, or in combination, have fostered the growth of the US service sector. Given the strength of those tailwinds, we see the services sector driving a greater portion of the US economy. What this means is folks that have relied heavily on the US manufacturing economy to power their investing playbook might want to broaden that approach.

Now let’s tackle the thematic headwinds here

Headwinds involve those companies that are not able to capitalize on the thematic tailwind. A great example is how Dollar Shave Club beat Gillette, owned by Proctor & Gamble (PG), and Schick, owned by Edgewell Personal Care (EPC), by addressing the pain point of the ever-increasing cost of razor blades with online shopping. Boom — Cash-strapped Consumer meets Connected Society.

While Gillette has flirted with its own online shave club, the price of its razor are still significantly higher, and as far as we’ve been able to tell, Schick has no such offering. As Dollar Shave Club grew and expanded its product set past razors to other personal care products, Unilever (UL) stepped in and snapped it up for $1 billion.

Going back to the beginning and the impact of the food delivery services like Blue Apron — are we likely to see food companies build their own online shopping network? Most likely not, but they are likely to partner with online grocery ordering from Kroger (KR) and other such food retailers. That still doesn’t address the shift toward healthy, prepared meals and it’s requiring a major rethink among Tyson Foods (TF), Campbell Soup (CPB), The Hershey Company (HSY), General Mills (GIS) and many others. Fortunately, we’ve seen some of these companies take actions, such as Hershey buying Krave Pure Foods and Danone SA (DANOY) acquiring WhiteWave Foods, to better position themselves within the thematic slipstream.

The key takeaway from all of this is that a thematic tailwind can be thought of as a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their business model to succeed. If they don’t, or for some reason can’t, odds are their business will suffer as they fly straight into an oncoming headwind.

Recall how long Kodak was the gold standard for family photographs, yet today it is nowhere to be seen, killed by forces that emerged completely from outside its industry. As digital cameras became ubiquitous with the advent of the smartphone and the cost of data transmission and storage continually fell, the capture and sharing of images was revolutionized. Kodak didn’t keep up, thinking that film would forever be the preferred medium, and paid the ultimate price.

As thematic investors, we want to own those companies with a thematic tailwind at their back — or maybe even two or three! — and avoid those that either seem oblivious to the headwind or won’t be able to reposition themselves, like a hiker who finds he or she has already gone way too far down the wrong path and is so utterly lost, needs to be helicoptered to safety.

Of course, when it comes to these “On-Demand Economy” darlings — Uber, Dollar Shave Club, Airbnb —few if any of them are publicly traded, which frustrates us so, since most of them are tapping into more than one thematic tailwind at once. If and when they do turn to the public markets for some added capital and we get a look into the economics of these business models, then we’ll also get to see the key performance metrics and financials behind these businesses.

In the meantime, stay tuned as we will be discussing more readily investable thematics next.

Closing Out 2016: What a Year it Has Been!

Closing Out 2016: What a Year it Has Been!

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As we write this, there are just over six trading days left in 2016. It’s been quite a year on all fronts, but in particular, for the stock market as nearly all of the year’s gains have come in the last several weeks. It seems every few days since the 2016 presidential election the major market indices are posting new highs to the board, including again last night as the Dow flirted with the 20,000 mark, which it is still doing this morning — what a tease!

When we look at the market landscape through our thematic lens we see that a number of our investing themes have performed rather well during 2016. From Aging of the Population and our shares in AMN Healthcare (AMN: +21.31%), to our Connected Society theme and our positions in Dycom Industries (DY: +5.46%), AT&T (T: +10.62%) and CalAmp (CAMP: +7.27%) shares, and Universal Display (OLED: +11.32%) that is a Disruptive Technology play, all of these have performed admirably and we see more upside ahead in the coming quarters.

The same holds true for Alphabet (GOOGL: +11.07%), Facebook (FB: +0.24%) and Amazon (AMZN: +3.9%) that round out our Connected Society holdings, but it’s also the case with Food with Integrity company United Natural Foods (UNFI: +15%) and Cash-strapped Consumer play Costco Wholesale (COST: +9.78%).

We also booked a number of wins over the last 12 months:

  • Aging of the Population and PetMeds Express (PETS) shares, up 13%; 
  • Cashless Consumption with USA Technologies (USAT), up more than 28%, and PayPal (PYPL) up just under 14%;
  • Connected Society and AT&T (T), up 18%;
  • Content is King theme and Regal Entertainment (RGC) shares, up more than 22%;
  • Guilty Pleasure and Philip Morris International (PM), up more than 17%;
  • Rise & Fall of the Middle Class and Kraft Heinz (KHC), up more than 15%.

With the S&P 500 up just under 11% year-to-date, we would argue that it pays to think different from the herd to uncover pronounced thematic tailwinds and uncover the companies best positioned to ride them.

To be fair, from time to time, we do fall short and in our minds both Sherwin Williams (SHW: -13.14%) and Whirlpool (WHR: -13.32%) serve as reminders to let the data talk to us.

In sum, it’s been a barn burner for the stock market post-2016 election, but as we’ve pointed out once again in this week’s Monday Morning Kickoff., the stock market has a habit of getting ahead of itself. Even CNBC’s Market Strategist Survey of 13 strategists’ outlooks published since the US election found the median 2017 S&P 500 price target is 2,325 — that is 2.5 percent ahead of where the S&P 500 currently resides.

Comments from industrial conglomerate Honeywell (HON) offered a more tempered view, which coincides with recent economic data discussed in greater detail in this week’s Monday Morning Kickoff. If you’re not reading each week’s Monday Morning Kickoff you receive as part of your Tematica Investing subscription, you’re really missing out.

In addition, we starting to hear from companies such as Adobe Systems (ADBE) to Nike (NKE), FedEx (FDX), Honeywell and General Electric cite the impact of the strong dollar on their respective 2017 outlooks. As we ponder that, we’d also note:

  • Stretched valuation as the market continues to climb higher of late
  • The current reading of 77 or Extreme Greed on CNN’s Fear and Greed Index.
  • The Consumer Confidence Index is now at its highest since July 2007.
  • The Dow Jones Industrial Average, S&P 500 and the Russell 2000 at or near overbought levels

To us here at Tematica, all of that against the current market environment means we are likely to face a move in the market in early 2017 that will remove some of the current froth. One of Coca-Cola’s old marketing slogans — “A pause to refresh” — is what we’re likely to see, as before too long companies report their December-quarter results. As they do that, some will no doubt raise expectations for 2017 and others, as you’ll see with sneaker retailer Finish Line (FINL) down below, are bound to disappoint.

From our perspective, the thematic tailwinds that power each of our positions on the Tematica Select List not only remain intact but, as we are seeing in the case of the Connected Society, Rise & Fall of the Middle Class, Disruptive Technologies, are only getting stronger. As good as a year as 2016 was for our thematic strategy, we see 2017 being even better. In other words, we’re just getting started…

 

Updates Updates Updates 

Amazon (AMZN) Connected Society 

After a few turbulent weeks, our Amazon shares are off to a solid start this week due to several pieces of news, a few of which solidly confirms one aspect of our thesis on the shares.

The first comes from The Wall Street Journal, which we posted to the Thematic Signals section of our website suggests Amazon is “looking at developing mobile technology for scheduling and tracking truck shipments.” We’d caution that the herd tends to miss what Amazon is doing as often as it gets it right.

In this case, given Amazon’s growing number of warehouse locations and the expanding role of Fulfilled By Amazon (FBA), we would not surprised to see Amazon flex its logistics muscles to get its cost under control as well as have greater control over deliveries. Should this turn out to be the case, we see it very much inline with Amazon’s air cargo efforts — a supplement to current logistics services offered by United Parcel Service (UPS) and others. We’ll continue to monitor this to see how real it is, and if so what the potential implications are.

The second piece of news comes from a new data published by Prosper Insights and Analytics that shows Amazon taking a clear lead in holiday shopping this year. After surveying 7,000 US adults, Propers Insights and Analytic found 26% bought “most” of their gifts from Amazon this year, up 10% over year-ago levels. (That 26% would include nearly all of us here at Tematica!)

Trailing well behind Amazon is Wal-mart (WMT) at 14.5% followed by Target (TGT), Kohl’s (KSS), Macy’s (M) and others, including Best Buy (BBY) and JCPenney (JCP), all of which were in the “single-digit range.”

We find the Prosper Insights and Analytics report rather confirming for the part of our Amazon thesis that focuses on the accelerating shift toward digital shopping and a key part of the Connected Society theme. Paired with data from comScore (SCOR) that online desktop spending is up double-digits since Thanksgiving, it looks like the holiday shopping season will be an Amazon one far more people year over year.

Next up, last night FedEx (FDX) reported inline revenue for the quarter that was up just over 19% year over year. The company, however, missed earnings expectations primarily due to lower operating profit at FedEx Freight and the company’s network expansion. That expansion is likely due to FedEx continuing to position itself for the structural shift that favors digital commerce, one of the key tenants behind our Amazon (AMZN) thesis.

As evidenced by FedEx comments during the earnings call last night, it has much work to do on its e-commerce catch-up initiatives, given “that non-e-commerce deliveries to residences and business-to-business traffic represent the vast majority of FedEx Corporation’s estimated $60 billion in FY ‘17 revenues.”

On the bright side for our Amazon shares, FedEx called out the “continued rapid growth of e-commerce” and the “rapid rise in e-commerce.” Add to this the latest data from comScore (SCOR) that showed online desktop spending continues to accelerate as we close in on the Christmas holiday. comScore noted:

“For the holiday season-to-date, $55.2 billion has been spent online, marking a 13% increase versus the corresponding days last year. The most recent week, Dec. 12-18, posted a strong 15% growth in online sales, marking $7.6 billion in desktop spending during the last full week before Christmas.” 

With Amazon once again taking the top spot for best online customer experience in the 12th annual Foresee Experience Index and surveys pointing to more shoppers buying on Amazon this year, we continue to see it in the pole position this holiday shopping season and beyond.

We have ample upside to our AMZN price target of $975, which keeps the shares a Buy. 

 

Costco Wholesale (COST) Cash-strapped Consumer 

This week Citi upgraded the warehouse retailer’s stock to “buy” from “neutral,” saying it sees a clear path to accelerating comparable sales, thanks to the abatement of deflation in food and gasoline. We’d add the continued expansion in the sheer number of warehouse locations bodes well not only for overall sales growth but also higher margin membership fees.

Over the last week, COST shares have rallied sharply to just under $164, which means there is less than 5 percent upside to our $170 price target. As such, we are not inclined to commit fresh funds to this position, nor should subscribers, and thus rate the shares a Hold for now.

 

Disney (DIS) Content is King 

The early estimates are in for Disney’s weekend debut of Rogue One: A Star Wars Story from Box Office Mojo and others, and they have the latest film in the Star Wars franchise taking in $155 million at the domestic box office and $290.5 million worldwide. That’s the 12th-largest opening of all time and marks only the second December film to debut over $100 million. If you guess the first one was last year’s Star Wars: The Force Awakens, you’d be right.

We see Rogue One’s domestic performance as rather impressive and ahead of the $150 million domestic consensus forecast, despite paling in comparison with last year’s Star Wars film. Make no mistake — despite the headlines saying that Rogue One failed to match Force Awakens, few were expecting it to do so, and even on its recent earnings call Disney warned about tough comparisons compared to Force Awakens. Versace saw the film and thought it was fantastic, especially given the rather surprise appearance at the end.

We do see Rogue One speaking to the power of the Star Wars franchise, which now under the Disney umbrella is set to have a new film each year for the next several years. With the holidays soon upon us, we’ll be monitoring Rogue One’s box office progress to gauge its staying power as we head into the holidays.

We’d also note that Rogue One crushed its next closest competitor, Disney’s Moana, which took in $11 million domestically over the weekend, bringing its domestic box office take to $161.9 million and to more than $280 million worldwide. But $150 million to Rogue versus $11 million for Moana clearly shows that once again, Disney is ruling the box office, and we expect the Disney machine to capitalize on the popularity of these films across its other businesses.

In addition to that, DIS shares were added to the US1 list at Bank of America/Merrill Lynch given what it sees as upbeat prospects for Disney’s parks and resorts, as well as its movie studios. Once again it seems we were ahead of the herd.

Our price target on DIS shares remains $125 and remain a Buy.

 

Under Armour (UAA)  Rise & Fall of the Middle Class 

The last 16 hours have seen a whirlwind of comments from Nike (NKE) and Finish Line (FINL), which on their face offer contrasting views on the athletic footwear market. Let’s tackle what they mean for our Under Armour shares.

Last night Nike bested earnings expectations on better than expected revenue, with strong performance in Western Europe, Greater China and the Emerging Markets as well as the Sportswear and Running categories.

There were two wrinkles that emerged during Nike’s earnings call — one was the company’s North America future orders, which came in at -4% vs. the consensus expectations of +1.2%. In recent quarters, Nike has downplayed the importance of its future orders given the growing impact of direct-to-consumer (DTC) and outlet sales, and talked up new products, especially for the basketball and running categories as it incorporates newer technologies, like Air VaporMax and others, across those lines. We’ve seen similar strong results at UA’s online business over the last several quarters.

Our key takeaway from Nike’s earnings call is that athletic footwear remains solid in North America and robust in markets being targeted by Under Armour.

The second wrinkle concerned the impact of the dollar on the company’s outlook, given Nike’s comment that “FX headwinds from further strengthening of the U.S. dollar have put downward pressure on our second half revenue forecast.” Currency is likely to have a more pronounced impact on Nike than Under Armour given that North America accounted for 47% of Nike’s Nike brand business during the November quarter. That compares to North America being roughly 98% of UA’s revenue in its September quarter.

Turning to Finish Line, its shares are getting crushed as the company reported comparable-store sales rose just 0.7% for its latest quarter vs. +8% consensus forecast. Sifting through comments from Finish Line, CEO Sam Sato said, “steep declines in apparel and accessories offset a high-single digit footwear comp gain.” Considering that footwear accounted for 88 to 89% of Finish Line revenue over the last few years, it seems safe to say it’s apparel and accessory business was crushed during the November quarter.

Given some information scrubbed from Finish Line’s Feb. 2016 10-K filing — 73% of Finish Line’s merchandise was purchased from Nike; FL’s top 5 suppliers accounted for 89% of its merchandise, and Finish Line’s business is nearly 100% US based — when comparing Finish Line’s apparel results vs. that for Nike’s North American apparel business, which rose +4% year over year in the November quarter, it sure smells like apparel share loss at Finish Line.

The bottom line for our Under Armour shares is Nike’s North American footwear comments and apparel results, as well as upbeat tone for the holiday shopping season, bode well for UA’s business and our shares. Finish Line’s comments on the other hand likely point to apparel share to other vendors.

Our price target on UA remains $40

 

Universal Display (OLED) Disruptive Technology 

Over the weekend there were several positive mentions for our Universal Display shares. Both articles were bullish, underscoring our thesis on Universal Display shares that the adoption of organic light emitting diode technology will be significant in 2017 and beyond.

Between the two, the more notable mention was in the Technology Trader column in Barron’s that said, “Other suppliers that could benefit in 2017 include module article chiclet Universal Display (OLED), which helps make possible light-emitting diodes, a technology for sharper, more energy-efficient screens that many expect will come to the iPhone 8 next year.”

True enough, the author trotted out the Apple (AAPL) iPhone speculation, but we have been hearing more and more of that.

That brings us to the second mention, which in our view is far more meaty, but also positive for our Universal Display shares.

Over the weekend, The Korean Herald reported, “All of Apple’s iPhone 8 OLED versions will be curved” and the OLED displays are to be sourced from Samsung. The report also goes on to note that “Samsung Display’s curved OLED capacity for Apple is estimated at around 70 million to 100 million units. This is less than half of Apple’s annual sales of the iPhone series, which stand at around 200 million units a year.”

The comment on limited Samsung capacity supports the growing notion that should Apple make the move to OLED display technology, which chatter suggests is increasingly likely, Apple is likely to do so in the higher end model on the next iPhone. While it doesn’t specifically call out the ramping industry capacity for OLED displays we’ve seen via new equipment orders at Applied Materials (AMAT) and Aixtron AG (AIXG), it does reinforce the shortage pain point. With more devices (TVs, wearables, smartphones, tablets) poised to adopt OLED display technology to improve battery performance and design thickness, we see more resources coming to address this pain point, which bodes well for Universal Display’s chemical and licensing business.

Given prospects for far greater OLED usage in 2017 and 2018, we are rolling up our sleeves to determine potential upside to our $68 price target.
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Facebook to copy Amazon and Netflix with original video programming

Facebook to copy Amazon and Netflix with original video programming

We’ve long suspected Facebook would eventually move past short video advertising into longer format programming to capture an even greater portion of the video advertising dollars that are fleeing traditional broadcast TV. It’s got the user base and aims to improve that monetization. Video content, especially outside the US, is a solid strategy to do so. As it does this and brings original programming to its users, much the way Amazon (AMZN) and Netflix (NFLX) are doing, Facebook starts to blur the lines between our Connected Society and Content is King investing themes.

Facebook wants to bankroll its own original video shows, the company’s global creative strategy chief, Ricky Van Veen, told Business Insider on Wednesday.

The videos Facebook wants to license will live in the new video tab of its mobile app and including “scripted, unscripted, and sports content,” according to Van Veen.

Source: Facebook wants to bankroll its own original shows – Business Insider

The root cause behind Facebook’s unwillingness to accept its role in the “news”

The root cause behind Facebook’s unwillingness to accept its role in the “news”

Facebook’s media headaches don’t start or end with fake news: With 1.8 billion monthly visitors, Facebook is a media-sharing powerhouse. But unlike the search giant Google or other big networks such as Twitter, Facebook exerts more control over what you see. Those News Feed algorithms are really, really good at getting you to click your way down a comfy rabbit hole. The election exposed how your own personal Facebook burrow — with its echo chambers, fake news and entry points for abuse — may not be a safest place to live.

Source: Facebook is the unwilling king of the news – CNET

 

Facebook is firmly rooted at the epicenter of the investment theme we call the Connected Society — the intersection of computing, broadband, mobility and the Internet changing the way we live.  There’s no disputing that.

Also crystal clear is the fact that Facebook pretty much controls the flow of news to a large portion of the world. Think about where you heard about the latest political or economic development? What about celebrity news? Or even more impactful, what about your local community news? Usually, it’s through Facebook that many of us are becoming aware of the happenings of the world.

But Facebook doesn’t seem to want to accept that role — or more specifically, doesn’t want to accept the responsibility of that role. By this, we mean the responsibility to curate, ferret out the minutia and keep the public informed of what’s important. What they need to know. What they should know. It’s what the country used to turn to Walter Cronkite, the major newspapers or the evening news on the major networks for on a daily basis.  “Just give me the facts please.”

But here’s the ugly reality — the dilemma that frankly all the “news” entities are dealing with —  facts don’t get people to click.  Facts don’t keep people tuned in. Facts don’t get people to pick up the paper or magazine. Facts don’t get people to share a story on Facebook. The National Enquirer figured that one out a long, long time ago, and Facebook and all of its engineers are particularly well-adapt and presenting stories and images in a way to drive shares, likes and clicks to no end.

Typically, what gets the metrics pumping, are the sensationalized stories. The stories you can’t believe. The behind-the-scenes gossip that everyone wants to know about. Needs to know about! Won’t believe when you find out about!

So if Facebook accepts its role as THE news curator for the world — which is a reason why it also sits in our Content is King thematic, by the way, — then what happens to the user-engagement metrics? What happens to the number of logins, posts, shares, “likes”, clicks?

If the company starts editing out the “fake news” or promoting the “true news” it might be good for the public, but bad for the business metrics. Or a more cynical viewpoint, if users believe Facebook isn’t just curating the facts, but taking a political slant in how it approaches the process (gasp!), then do users disappear altogether and instead go back to their own “social networks”?

These are the things we are sure Mark Zuckerberg, Sheryl Sandberg and the rest of the team at Facebook are struggling with, especially after the latest election cycle.

Can’t we all just share angry cat memes?

 

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Impact of Connected Society Taking to the Skies

Impact of Connected Society Taking to the Skies

In a surprising and likely controversial step, U.S. aviation regulators on Thursday suggested they are leaning toward eventually allowing in-flight calls from airline passengers—with two important caveats: airlines will have the option of whether to provide the service, and passengers must be informed well in advance if the flight allows calls.

Source: Transportation Department Weighs Allowing Phone Calls During Flights – WSJ

It seems that much of the swirl around this development by the DoT — reversing course and potentially allowing users to place and receive phone calls while in flight — is focused on the social aspect of the situation. The annoyance of having to listen to someone else’s conversation for 5+ hours on the flight from LAX to JFK.

From our perspective, it’s a trivial issue. As frequent riders of Amtrak between DC and NYC, there aren’t that many people on the phone for the most part, and it’s the reason by God gave us noise canceling headphones.

No, the real issue here is while people will be placing their seats in the full and upright position and locking their tray tables, they won’t be switching their smartphones over to airplane mode. And if the phones are on, think about how much data and content could be consumed during the over 75,000 daily flights across North America! Yes, many flights now have WiFi, but oftentimes we find ourselves just tucking away our phones and focusing on some “offline work.” But staying “connected” via voice calls might just push users over the edge to keep their phone out and signed up for GoGo inflight WiFi.

Of course, just like the jet stream across the United States, one plane’s tailwind is another one’s headwind. More data and connectivity on planes is great news for stocks in our Content is King and Connected Society investment themes . . . bad news for book publishers who cherish those full price book sales at the airport terminal.

It will likely be a few years before this becomes a reality. In the meantime, have a look at this video below that shows all the flights across North America in a single day — like little ants!