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Revisiting Position Ratings as the Stock Market Grinds Higher

Revisiting Position Ratings as the Stock Market Grinds Higher

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Since our last issue, the stock market continued to move higher on the news that President Trump will soon be sharing his tax overhaul plan and Fed Chairwoman’s Yellen’s congressional testimony yesterday. We review Yellen’s comments below in greater detail, but the point is the Fed, in aggregate, sees enough oomph in the economy to keep its stated goal of up to three rate increase this year in the mix. Candidly, we didn’t expect Yellen to deviate from the script given the next Fed meeting is still several weeks away, and far more data will be had ahead of it.

With the market climbing, we had a number of strong performers on the Tematica Select List, including recently added Disruptive Technology company Nuance Communications (NUAN) and  Safety & Security play PureFunds ISE Cyber Security ETF (HACK). Both of those remain Buys at current levels. Several other positions are closing in fast on their respective price targets. Last week we trimmed back the position in Costco Wholesale (COST) and reduced it to a Hold from Buy. We’d note that’s a true Hold, not to be interpreted in the herd mindset as a loose Sell recommendation. We continue to see Costco benefitting from our Cash-strapped Consumer theme and its plan to open additional warehouse clubs, which boosts higher margin membership fee income.

Similarly, this morning we are reducing our ratings on both Universal Display (OLED) and PowerShares NASDAQ Internet Portfolio ETF (PNQI) from Buy to Hold. Both have enviable runs, the former as more talk of Apple’s next iPhone iteration heats up and the potential of OLED screen and the latter given the moves we’ve enjoyed in our Facebook (FB) and Alphabet (GOOGL) shares. As we adjust these ratings, we’re also going to layer in stop losses as well:

  • We will set the OLED stop loss at $60, which ensures a gain of at least 13 percent.
  • And set a stop loss at $88 for PNQI shares, which ensures a 5 percent gain.

Positions that we’ll be watching closely as they move closer to our price targets include AMN Healthcare (AMN), Facebook FB), Alphabet (GOOGL) and Disney (DIS) shares.

 

What’s all the Yellin’ About Yellen?

As we mentioned above, yesterday Fed Chairwoman Janet Yellen began her two day session in front of Congress for her semiannual testimony on monetary policy. Last night Tematica Chief Investment Officer, Chris Versace, joined CGTN’s Global Business to discuss the testimony, which was very much a non-surprise given the Fed Chair is not likely to tip the Fed’s policy hand in between meetings, particularly when we have ample economic data ahead and we’ve yet to get the particulars on several Trump policies. In her prepared speech to the Senate Banking Committee yesterday, Yellen said the central bank can continue to raise interest rates slowly although it would be “unwise” to wait too long. Pretty much more of the same if you ask us.

Over the last few months, the pace of manufacturing activity has picked up as evidenced by the monthly ISM manufacturing data and manufacturing PMI metrics from Markit Economics. And while it has us thinking another hike is in the cards, we agree with Yellen that with little meat on the Trump policy bone as yet, the Fed might hold out until more specifics are shared before boosting rates. This also means much more economic data to factor into their economic group-think. Odds are this means a rate hike is more likely at the May FOMC meeting than at the March one.

Today Yellen takes the stage in front of the House Financial Services Committee, and while it’s a bit mean to say we do tend to get a hearty chuckle out of watching some of those folks ask questions they don’t really understand. That good fun aside, we don’t expect Yellen to deviate from the Fed script anytime soon.

Updates, Updates, Updates

Over the last few days, there were several noteworthy items for a few of our Tematica Select List holdings. The following is a roundup of those developments.

The Walt Disney Co. (DIS)    Content is King

Disney raised admission prices for U.S. theme parks, by as much as $5 for certain one-day tickets at the Magic Kingdom theme park in Orlando and Disneyland. The cost of a regular ticket at the Magic Kingdom, effective yesterday, is now $115, while the same at Disneyland is now $110. The $124 peak price at Magic Kingdom, which includes many summer days and holidays, is unchanged.

As a consumer, we may cringe at the Disney’s ticket prices, but there is no denying its parks remain a key attraction, and new exhibits/rides, such as Frozen and eventually Star Wars, will only serve to keep people coming. From an investor perspective, price increases like these tend to drive margin expansion and profits, and that’s something we certainly like.

  • Our price target on Disney remains $125, and we continue to rate DIS shares a Buy. 

 

AT&T (T)  Connected Society

AT&T competitor Verizon (VZ) announced it was returning to unlimited data plans, in part to combat Sprint (S) and T-Mobile USA (TMUS). Typically, there tends to be a herd mentality when such programs are introduced, which means we’ll be watching to see if AT&T joins the fray — and if so, how the company tiers its product offering.

Also with AT&T, when asked about the pending merger with Time Warner (TWX), CEO Randall Stephenson said, “We still think we’ll be closed by the end of the year.” That matches recent comments from Time Warner, and likely means AT&T shares will be somewhat rangebound until the proposed merger clears its review by the Department of Justice. Time Warner shareholders will meet today to decide on the company’s proposed $86B merger with AT&T — a “yes” vote is expected.

  • We continue to rate T shares a Hold, with a $45 price target. All things being equal, we’d look to revisit our rating on the shares below $40.
Amazon (AMZN)    Connected Society

As it relates to our position in Amazon, over the weekend there was news that FedEx (FDX) has launched FedEx Fulfillment, a logistic network for small and medium businesses. Given the accelerating shift to digital commerce (one of our key investment pillars for AMZN shares), it comes as little surprise that FedEx would seek to replicate Amazon’s Fulfilled By Amazon (FBA) business. For FBA transactions, Amazon receives a portion of each sale, but could, at the same time, be competing with the vendor.

The differentiator, in our view, is Amazon’s Prime service, which offers “free” two-day delivery for the shopper, and a growing list of items/services. Given the overall shift to digital commerce, odds are this rising tide will lift several boats, but to us, the real question is how vendors will offset shipping costs paid by shoppers. If they stick it to shoppers, this effort by FedEx could be more sizzle than steak.

 

AMN Healthcare (AMN)    Aging of the Population

The December JOLTS report showed yet another month-over-month increase in health-care and social assistance jobs, which led to a 12 percent increase in December 2016 compared to December 2015. Meanwhile, hiring levels in December remained relatively unchanged, up only 2.1 percent year over year.

In our view, this confirms the difficulty in finding quality staff, which bodes well for AMN’s business. Longer term, by 2020, the U.S. is expected to need 1.6 million more direct-care workers than in 2010, which equates to a 48 percent increase for nursing, home-health and personal-care aides over the decade, due primarily to the aging of 78 million baby boomers.

Our intent remains to nibble on AMN shares closer to $35 to build out the position at better prices. AMN will report its quarterly earnings tomorrow (Feb. 16) and consensus expectations call for EPS of $0.54 and revenue of $476.4 million.

  • We have a $47 price target on AMN and at current levels, that leaves 21 percent upside; as such we will look to revisit the rating and the price target after the company’s earnings announcement.

 

Dycom Industries (DY)  Connected Society

Our shares of this Connected Society infrastructure play rose more than 2 percent since last week following the news that CenturyLink’s (CTL) 2017 capital spending will be $2.6 billion vs. $3.0 billion in 2016. While overall spending is ticking down, on its earnings call CenturyLink management shared that its “broadband investments for 2017 are expected to actually be a little higher than 2016 levels.” Combined with 2017 capital spending plans for AT&T, Verizon, and Comcast, it looks like total capital spending on broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber).

We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending. We are going to sit tight and be patient with the position given our view that, worst case, it’s only a matter of time for next-generation network technologies to be deployed.

  • We rate Dycom shares a Buy with a $115 price target.

 

International Flavors & Fragrances (IFF) Rise & Fall of the Middle Class

After today’s market close, IFF will report its December quarter earnings. Consensus expectations have the company delivering EPS of $1.16 on revenue of $752.3 million. As we’ve shared previously, flavor and fragrance competitor results set a sound footing for IFF’s quarterly earnings that will be reported this week (Feb. 15).

We remind subscribers that given IFF’s international exposure, currency is likely to weigh on its December-quarter results as well as its near-term outlook. But, as we have said before, we see that largely reflected in the share price over the last few months.

  • We continue to see ample upside to our $145 price target over the coming quarters fueled by rising disposable income, particularly in the emerging markets, but also from the shift in consumer preferences to natural/organic flavors.

 

Nuance Communications (NUAN)  Disruptive Technology

Following solid December-quarter earnings last week, shares of this voice technology company rose more than 6 percent over the last several days, bringing our return in the shares to roughly 9 percent. In our view, the performance in the most recent quarter shows that despite all the headway we are hearing about Amazon’s (AMZN) Alexa voice digital assistant and similar offerings from Alphabet (GOOGL), there is ample opportunity in this expanding voice technology market for Nuance and its offerings to the health-care, mobile/auto, enterprise and imaging markets.

During the conference call Nuance shared that while there has been growing interest in voice interface technology in the last few years, the arrival of Amazon and Alphabet products has accelerated the pace of investment across several Nuance customer verticals. These opportunities along with Nuance’s expanding solution set, which includes artificial intelligence and analytics, bodes well for the company’s competitive position in the coming quarters.

Longer term, Tractica forecasts total voice digital assistant revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021. That is also likely to put Nuance on the M&A contender list for those larger entities that need to expand their voice technology capabilities.

  • Our price target on the shares remains $21 and our rating a Buy. All things being equal, the line at which we will revisit that rating is around $19

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Jeff Bezos wants Amazon to be the next HBO, Showtime | New York Post

Jeff Bezos wants Amazon to be the next HBO, Showtime | New York Post

Amazon over the past couple of years has become the prime player (sorry for the pun) in our Connected Society investment theme given it’s dominance in the eCommerce and cloud computing space. That same dominance and push into eCommerce also places it at the heart of the

The third theme Amazon dances around is Content is King, given its push into original programming as of late. And it’s not just content, it’s really, really good content that is starting to win awards, and in some cases even rewriting the rules around awards shows such as the Emmy’s. We haven’t added it to that theme yet, simply because the firm doesn’t derive much if any of its operating profits from its content — most speculate that it’s actually a loss. And that is likely not going to change given this quote from a story in the NY Post:

For Amazon, however, the game is not simply about winning awards. The bigger prize is getting customers to spend more time at the site so they will click around and start shopping.

Source: Jeff Bezos wants Amazon to be the next HBO, Showtime | New York Post

 

Sort of harkens back to the days when large brands like GE used to be the sole sponsors of TV shows, and in some cases a company name even made it into the title of the show: Hallmark Hall of Fame, Texaco Star Theatre, The Colgate Comedy Hour, Kraft Television Theatre.

Does viewership of Man in the High Castle or Amazon’s breakthrough hit this year Grand Tour lead to more shopping? We’d like to see the math behind that, but nevertheless, you can’t argue with the strategy. Plus, we love much of the content and the free 2-day shipping!

 

Amazon Alexa makes Jeff Bezos & Steve Boom two of the most powerful men in music

Amazon Alexa makes Jeff Bezos & Steve Boom two of the most powerful men in music

Amazon founder Jeff Bezos would make almost any list of the world’s most powerful people. In retail, he’s clearly on top, and in tech, he’s close to it. In book publishing, he would be the undisputed No. 1 for 10 years running. In addition to a $65 billion stake in Amazon, Bezos owns the Blue Origin rocket company, The Washington Post, his own venture capital firm and a founder’s stake in Google. He might be the most powerful businessman alive, and his company is a credible contender to be the stock market’s first trillion-dollar corporation.

But the music business remains unconquered territory for Amazon. The company’s early lead in CD retailing was undone by MP3 piracy, and during the digital downloading craze Amazon was overtaken by Apple’s iTunes Store. A 2005 internal experiment with music streaming at Amazon was scuttled before it launched, creating a opening that’s now filled by Spotify, with 40 million subscribers, and Apple Music, with 20 million. The company’s latest bid for more eardrums is Amazon Music Unlimited, a subscription-based streaming service launched in October 2016.Alexa, Amazon’s branded digital assistant, will be the determining factor in its success. The sophisticated voice-recognition algorithm that

Alexa employs has emerged during the past year as the leading technology of its kind. Having captured this lead, Bezos has been pushing Alexa hard, first through his Amazon Echo speaker, and, more recently, through its diminutive companion, the Amazon Echo Dot, which was the company’s top-selling item this past holiday season. Bezos’ enthusiasm has spread to the music industry, where executives speak in glowing terms of the devices. “The metric you look at more than any other to determine whether a subscriber is going to stick around is engagement,” says Ole Obermann, chief digital officer of Warner Music Group. “It’s still early days, but the engagement numbers we see from these devices are really, really good.”

Source: Amazon’s Jeff Bezos & Steve Boom on Starting a New ‘Golden Age’ for Music | Power 100

And the Hacking Continues!

And the Hacking Continues!

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After Gapping Up Following Friday’s January Employment Report, The Market Is Trading Sideways Again This Week

Over the last week, the S&P 500 rose 0.6 percent, with the bulk of that move coming on the heels of the January Employment Report. As we pointed out in this week’s Monday Morning Kickoff, the face of that report was mostly positive, and when paired with other January manufacturing reports out last week, it likely paves the way for the Fed heads to start jawboning about a potential rate hike at the March FOMC meeting.

Well, we heard just that when Philadelphia Federal Reserve Bank President Patrick Harker on Monday said an interest-rate hike should be on the table at the U.S. central bank’s next meeting, in March. Should other domestic economic data, like the aforementioned January manufacturing data, continue to improve month over month, we expect the herd view to skew toward a March rate hike.

Looking across the Atlantic, however, as expected we are indeed hearing more about Grexit and Frexit this week. Odds are, we have not heard the last of those rumblings as we head into the 7th inning with 4Q 2016 earnings reports. Given where we are in the current earnings season, we have several updates to share on the Amazon (AMZN), CalAmp Corp. (CAMP), Dycom Industries (DY), Facebook (FB), and International Flavors & Fragrances (IFF) positions on the Tematica Select List.

At the same time, we see not only cyber attacks once again taking over the headlines — or at least what non-President Trump headlines there are — but we see impressive order and booking metrics as cyber security companies report their quarterly results.

This sets us up with a new position for the Tematica Select List so without further ado…

And the Hacking Continues!

Issuing a Buy on PureFunds ISE Cyber Security ETF (HACK) shares
as part of our Safety & Security investing theme

Once again cyber hacking is back in the news on several fronts:

  • The hospitality giant InterContinental Hotels Group (IHG) has confirmed that payment systems of 12 US hotels were victims of a massive data breach between August and December 2016.
  • An anonymous attack took down web-hosting company Freedom Hosting II, which hosts dark websites — sites that require software to access. All told, thousands of dark websites were taken offline in the process.
  • Taiwan is investigating an unprecedented case of threats made to five brokerages by an alleged cyber-group seeking payment to avert an attack that could crash their websites.
  • Norway’s foreign ministry, army, and other institutions have been targeted in a cyber-attack by a group suspected of having links to Russian authorities, according to Norwegian intelligence.

And that’s just a sampling of the cyber attack related headlines over the last few days. When we add in the growing number of corporate cyber attacks as well as those against government institutions (remember those from last November?), we are reminded that a few years ago former Defense Secretary Leon E. Panetta warned that the United States was facing the possibility of a “cyber-Pearl Harbor” and was increasingly vulnerable to foreign computer hackers who could dismantle the nation’s power grid, transportation system, financial networks, and government.

This earnings season we’ve seen a pickup in orders at a number of cybersecurity companies ranging from Fortinet (FTNT) and Checkpoint Systems (CKP) to Proofpoint (PFPT). Sifting through those reports, we find several common items bubbling to the surface:

There is the secular trend in cybersecurity that includes not only adoption of cyber security solutions for Internet of Things and Cloud, but also customers migrating to integrated solutions over single-point ones.

That migration is driving vendor consolidation, which with hindsight explains some of the extended sales cycles we heard about in the back half of 2016.

One positive is companies like Fortinet are seeing a pronounced pick-up in larger deal size, even as they add more customers. With Fortinet, it added 10,000 customers during 4Q 2016, which left it total customer base to more than 300,000. Meanwhile, Fortinet experienced significant growth in its larger deal sizes, up 31-39 percent for deal sizes above $500,000 and $1 million respectively.

This tells us that corporations and other institutions are stepping up their game for this dark side of our Connected Society investing theme. That bodes very well for cybersecurity stocks, which represent a key aspect of our Safety & Security investing theme.

The issue is deciding which one to place our hard-earned capital in… in our view, the near constant one-upmanship between hacker & attackers and cyber security firms looks an awful lot like the gaming console “wars” from a few years ago. Every time there was a hot new game, gamers would flock to the new platform. As cyber attackers become more creative, we suspect we are likely to see some cyber security firms respond more quickly than others, leading to market share shifts and better revenue and profit growth.

 

While this may sound like a complex problem, the solution could not be simpler.

Rather than focus on any one or two cyber security companies, instead we’ll place a basket of them onto the Tematica Select List. That basket is PureFunds ISE Cyber Security ETF (HACK), which counts Fortinet, Checkpoint Software, Palo Alto Networks (PAWN), Proofpoint, Symantec (SYMC), Qualys (QLYS), CyberArk Software (CYB) and Imperva (IMPV) among its top holdings. In sum, those eight positions account for just under 41 percent of the ETF’s assets.

Over the last several months HACK shares have been on a tear, but as our Connected Society theme continues to expand to include more devices (the Connected Car, Connected Home, the Internet of Things) across more of the globe (see Facebook’s 4Q 2016 earnings results below for an example of this), odds are the demand for cyber security solutions will remain robust. Just take a look at how often people in restaurants and elsewhere are checking their smartphones — the Connected Society toothpaste is not going to go back into its tube.

  • As such, we see long legs ahead for the cybersecurity aspect of our Safety & Security investing theme, which to us makes HACK a core, long-term holding.
  • In keeping with that, we are issuing a Buy on PureFunds ISE Cyber Security ETF (HACK), with a long-term price target is $35.
  • We’re inclined to use pullbacks below $25 to improve our cost basis. 

We would point out that cyber security is one aspect of our Safety & Security investing theme, which also includes personal, homeland and corporate security. President Trump continues to speak about rebuilding the US military, which should spur demand for a variety of defense companies. As more clarity comes to these proposed plans, we’ll look to include the proper exposure should valuations offer a compelling entry point. Stay tuned.

 

 

Amazon (AMZN) Connected Society 

Since the calendar turned to 2017, Amazon shares have been on a nice trajectory. Following December-quarter results, however, which included weaker-than-expected guidance for the current quarter, largely due to foreign currency issues, Amazon shares slipped just over 3 percent this past week. Given the comments we’ve heard across the earnings spectrum this reporting season about foreign currency, Amazon was bound to disappoint. Excluding the $558 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 24 percent compared with fourth quarter 2015 versus the reported 22 percent increase for the quarter.

We also continue to see the company investing for the long term as it builds out its streaming content, expands its Fulfilled By Amazon and other initiatives such as Alexa, its voice digital assistant. Even so, margin expansion at both the North American business, as well as Amazon Web Services, enabled Amazon to handily beat consensus EPS expectations of $1.42 with reported earnings of $1.54 for 4Q 2016. Year over year, EPS improved more than 50 percent despite the stepped-up level of investments in the second half of 2016 and revenue shortfall of nearly $1 billion in the December quarter. To us, this means those who have questioned Amazon’s ability to deliver profitable growth while continuing to invest are likely to rethink their position . . . or they should be.

As investors, our view tends to be skewed to the medium to longer term. It’s that view that recognizes Amazon continues to invest for future growth as it benefits from the accelerating shift to digital shopping and Cloud adoption that led Amazon Web Services (AWS) to grow 47 percent year over year in the December quarter. For 2016 in full, AWS revenue rose 55 percent to more than $12 billion, with margins rising to 30 percent from 23.6 percent in 2015. To put this into context, AWS accounted for just 9 percent of overall Amazon revenue in 2016 but was responsible for just over half of the company’s 2016 operating income.

Turning to Amazon’s North American business, revenues climbed 22 percent in the December quarter, but operating margins in that business rose to 4.7 percent. Doing some quick math, we’d note the incremental margin for the North American business clocked in at 6.8 percent, which tells us the company is indeed realizing volume benefits and other synergies in this business.

Amazon’s international business continues to be a drag on overall profits as it posted operating losses both for the December quarter and for 2016 in full. As we have seen in recent quarters, Amazon will continue to invest for future growth, but it has developed a more disciplined approach, and we suspect that approach will be utilized in the International business as well.

This brings us to the company’s guidance for the current quarter, which fell short of consensus expectations due in part to foreign exchange rates. As Apple (AAPL) CEO Tim Cook noted on that company’s earnings call, foreign exchange will be a “major negative” as the company moves from the December to the March quarter.

The same holds true for Amazon, which shared that it expects foreign currency to impact current quarter revenue by $730 million. Factoring that into the consensus view that expected revenue for the current quarter will land near $36 billion, Amazon’s guidance of $33.25 billion to $35.75 billion, up 14 percent-23 percent year over year, is far more understandable. Stepping back, that year-over-year guidance is in a very challenging retail environment and in our view implies continued share gains at both the North American and AWS businesses. On the operating income guidance, Amazon again offers a range that is wide enough to fly a 747 through.

Stepping back and looking at the company’s competitive positions poised to benefit from their respective Connected Society tailwinds — the shift to digital consumption (shopping, content streaming, grocery) and Cloud adoption — we continue to see favorable revenue and profit growth for AMZN over the long term.

  • We’ll continue to monitor retail sales data and Cloud adoption as well as other relevant data points, but for now, are keeping our $975 price target for Amazon shares as well as our Buy rating. 
  • To be blunt, Amazon is a stock to own, not trade. We’d suggest subscribers who are underweight in the shares use the recent pullback to their long-term advantage.

 

The Walt Disney Company (DIS) Content is King

Last night Content is King company Walt Disney reported December quarter earning of $1.55 per share, $0.06 per share better than consensus expectations. Offsetting that upside surprise, which was partly fueled by the company’s share buyback efforts given the near 4% drop in the share count year over year, revenue for the December quarter came in lighter than expected at $14.78 billion vs. the consensus that was looking for $15.29 billion.

In our view, even though revenue and earnings fell compared to the December 2015 quarter we have to remember the year-ago quarter was one for the record books due in part to the impact of Star Wars: the Force Awakens on several Disney businesses.

  • Given the tone of the underlying business, which should improve throughout the year, and prospects for Disney to further shrink its share count in the coming quarters thereby enhancing EPS metric in the process, we are keeping our $125 price target intact even as several Wall Street firms are boosting their price targets to levels higher or inline with ours.
  • We continue to rate the shares a Buy, but would advise subscribers that are underweight the shares to be more aggressive at price below $105 should they arise in the coming weeks. 

 

Let’s Dig into the Details of Disney’s Latest Quarter

For a year at the company that had been described as one starting off slow and building throughout the year, the December quarter was, in our view, a solid one, especially after factoring in the results from the latest installment of the Star Ware franchise, The Force Awakens.

Without question, the standout-out performance was had at the company’s Parks and Resorts business which delivered a 13% increase in operating income on “just” a 6% revenue increase year over year. That business continues to benefit from tight cost controls as well as price hikes taken during calendar 2016. As we get ready for spring break travel season, we’ll be watching for potential 2017 price hikes at the domestic parks. In late May, Pandora: The World of Avatar will open at Disney’s Animal Kingdom in Orlando, Florida. This follows the roll out of Frozen across several parks, and longer-term yet-to-be-named Star Wars-themed lands at Walt Disney World and Disneyland in 2019.

Near-term, the Parks business will benefit from an extra week in the current quarter, but with the Easter holiday falling later than usual this year and landing in the June quarter that timing issue is expected to weigh on current quarter prospects. Timing will also impact the Studio business, which has just one major release in the current quarter — Beauty & the Beast — which looks to be a strong performer, but will be forced into comparisons to The Force Awakens and Zootopia in the year ago quarter.

Moving past the current quarter, the Studio business has a number of Marvel, Pixar and Star Wars films in the pipeline that include a new Spider-Man movie, a sequel to the Cars film, Guardians of the Galaxy 2 and the next Star Wars installment, all of which makes for a very strong second half of the year.

That brings us to the company’s Media Networks business, which is composed of Cable Networks and Broadcasting. This segment has been one investors have been watching closely given the performance of ESPN over the last several quarters and questions about the broadcasting business as streaming alternative become more robust. Case in point, our own AT&T’s DirecTV Now and a similar service soon to be launched by Hulu. During the yesterday’s earnings conference call, Bob Iger reminded participants of initiatives to bring ESPN content to various streaming platforms (Sling TV, PlayStation Vue, DirecTV Now, and Hulu). After the call, The Wall Street Journal reported a new unannounced but signed deal with YouTube. Combined with its BAMTech acquisition, Disney continues to move in the right direction to reposition the Media Networks business to deliver content to consumers when and where they want it. We’ll be looking for additional color on the YouTube relationship, including advertising revenue potential.

Outside of the company’s performance and business outlook, the biggest news that likely has investor tongues wagging this morning is the news that CEO Bob Iger is open to staying after his contract expires in 2018. We see that helping to calm the transition concerns and reassures investors that Iger is likely to remain on board to groom his successor.

On the housekeeping front, Disney repurchased about 15 million shares for about $1.5 billion during the December quarter. Including the current quarter, Disney has bought back some 22 million shares for approximately $2.2 billion leaving $5-$6 billion to go on its announced plan to spend $7-$8 billion on buying back shares this year.

 

CalAmp (CAMP) Connected Society

CAMP shares rose modestly last week, bringing the year-to-date return to 5.0 percent, which is well ahead of the major market indices on the same basis. As we’ve shared, one of the key near-term catalysts for CAMP shares is the electronic logging device (ELD) mandate, which requires trucking companies to move from paper logbooks to electronic logs to record drivers’ hours of service by Dec. 18, 2017.

Last week, freight transportation companies Landstar (LSTR) and Hub Group (HUBG) reported quarterly earnings and inside those conference calls was some bullish commentary for CalAmp. Landstar shared that it has programs to migrate the non-complaint portion of its truck fleet to ELDs before year-end and it’s “beginning those conversations now in order to make that occur.” While Hub Group did not call out ELD spending specifically, it acknowledged that its capital spending would trend higher year over year in 2017 due in part to technology-related investments. Given the ELD mandate, we suspect there at least a portion of that spending will be to ensure its vehicles comply by the current deadline.

Industry estimates suggest more than one million ELDs will be deployed in the U.S. this year to comply with that mandate. This bodes very well for CalAmp’s core telematics systems business (57 percent of revenue) in the coming quarters. Longer term, we continue to see the company’s business model benefiting from the connected vehicle market, which includes autos, trucks and other equipment like that from customer Caterpillar (CAT).

  • We continue to rate CAMP shares a Buy with a $20 price target.

 

Dycom Industries (DY) Connected Society

As we noted in last week’s Tematica Investing, several of Dycom’s key customers recently reported quarterly earnings and the combined capital spending plans of those customers — AT&T, Verizon, and Comcast — look to be flat to up year over year, with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). This week we’ll get quarterly results from CenturyLink (CTL) and given the prevailing trends we expect it, too, will offer a favorable capital spending outlook for 2017 and beyond. Having said that, we will listen for any positive or negative impact in CenturyLink’s $34 billion plan to buy Level 3 Communications (LVLT).

We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending required to keep feeding our data-hungry Connected Society investment theme. In our view, the current share price offers subscribers who are underweight in Dycom an excellent opportunity to pick up the shares at better prices than we’ve seen recently.

  • We continue to rate Dycom shares a Buy with a $110 price target.

 

Facebook (FB) Connected Society

Despite delivering better-than-expected December-quarter earnings with strong user metrics and average revenue per user (ARPU), FB traded modestly lower following those quarterly results. To us, the one statistic that jumped out at us was the company’s ability to get nearly 30 percent more revenue per user during the quarter.

  • With advertising dollars continuing to shift to digital platforms, we continue to see Facebook’s efforts paying off in the coming quarters. 
  • As such, we continue to rate shares a Buy. As we do this, we’re boosting our price target to $155 from $150.

 

Now onto the quarter results . . . 

Facebook reported December quarter EPS of $1.41, well ahead of the $1.31 per share consensus forecast. Revenue for the quarter climbed more than 50 percent, year over year, to $8.63 billion, besting revenue expectations of $8.49 billion. Sifting through the various metrics from daily active users to mobile daily active users, all the metrics were trending in the right direction with both up 17  to 18 percent year over year.

We continue to see the growing influence of mobile on Facebook’s business with 1.74 billion mobile monthly active users, roughly 93 percent of the company’s monthly active user base. As we mentioned above, we continue to see Facebook capturing advertising share, and it did just that in the December quarter as mobile advertising accounted for roughly 84 percent of its advertising revenue in the quarter. We chalk this up to Facebook monetizing more of its platforms (Facebook, Instagram and now Messenger) as well as the greater use of video. As the company continues to improve its ad targeting across users, we would expect some lift in pricing, which should benefit margins.

Part of our initial investment thesis for Facebook was not only the social network company’s ability to not only expand its reach across the globe, but also improve average revenue per user (ARPU) metrics as it does this. During the quarter, the company’s ARPU climbed more than 30 percent, year over year, on a global basis. As one might expect, ARPU remains skewed heavily to the U.S. and Canada, which clocked in at $80, up some 47 percent year over year. As a result, U.S. and Canada accounted for just over 50 percent of revenue followed by Europe (23 percent), Asia-Pac (15 percent) and Rest of World (10 percent). Even so, all geographies were up double-digits, year over year, from a low of 17 percent (Asia-Pac) to a high of 28.7 percent (Europe).

The bottom line is our thesis on the shares remains intact, and we continue to see the tailwinds blowing hard as advertisers continue to focus on digital advertising. We liken this to the shift to digital shopping by consumers that is benefiting our Amazon (AMZN), $839.40, 5.54 percent) shares. Much like that shift, we do not see the one behind Facebook slowing in the near-term.

 

International Flavors & Fragrances (IFF) 

Rise & Fall of the Middle Class

In a quiet week of trading, with no company-specific news, IFF shares were down 1.6 percent, keeping them in the same range they’ve been in over the last several weeks. We continue to see ample upside to our $145 price target over the coming quarters fueled by rising disposable income, particularly in the emerging markets, but also from the shift in consumer preferences to natural and organic flavors. We saw confirmation in this from competitor Givaudan, which as part of its December-quarter earnings report last week shared that, “Natural flavors have been going at an average of 8 percent over the last two years… and represent more than 40 percent of our flavor sales.”

For its fragrance business, Givaudan achieved double-digit growth in North America and a solid performance in Latin America and the Middle East. We see these results as a positive for IFF when it reports its quarterly results on Feb. 15, but we will remind subscribers that given IFF’s international exposure, currency is likely to weigh on its results as well as its near-term outlook. But as we have said before, we see that largely reflect in the share price. We continue to focus on the growing shift to organic flavors and fragrances, the former of which has soda companies such as Coca-Cola (KO) and PepsiCo (PEP) looking to reformulate their products to exclude sugar.

Longer term, the outlook remains bright for this market as the Freedonia Group’s forecast calls for global demand for flavors and fragrances to reach $26.3 billion by 2020, which would be a 21 percent increase from $21.7 billion in 2015.

  • We continue to rate IFF shares a Buy at current levels.

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Music, Newspapers . . . “Hollywood, these days, seems remarkably poised for a similar disruption”

Music, Newspapers . . . “Hollywood, these days, seems remarkably poised for a similar disruption”

Hollywood, these days, seems remarkably poised for a similar disruption. Its audiences increasingly prefer on-demand content, its labor is costly, and margins are shrinking. Yet when I ask people in Hollywood if they fear such a fate, their response is generally one of defiance. Film executives are smart and nimble, but many also assert that what they do is so specialized that it can’t be compared to the sea changes in other disrupted media. “We’re different,” one producer recently told me. “No one can do what we do.”

That response, it’s worth recalling, is what many editors and record producers once said. And the numbers reinforce the logic. Movie-theater attendance is down to a 19-year low, with revenues hovering slightly above $10 billion—or about what Amazon’s, Facebook’s, or Apple’s stock might move in a single day. DreamWorks Animation was sold to Comcast for a relatively meager $3.8 billion. Paramount was recently valued at about $10 billion, approximately the same price as when Sumner Redstone acquired it, more than 20 years ago, in a bidding war against Barry Diller. Between 2007 and 2011, overall profits for the big-five movie studios—Twentieth Century Fox, Warner Bros., Paramount Pictures, Universal Pictures, and Disney—fell by 40 percent. Studios now account for less than 10 percent of their parent companies’ profits. By 2020, according to some forecasts, that share will fall to around 5 percent. (Disney, partly owing to Star Wars and its other successful franchises, is likely to be a notable outlier.)

Source: Why Hollywood as We Know It Is Already Over | Vanity Fair

 

Content is King — so much so that we have an entire investment theme created around the concept. The players in that theme seem to be evolving each and every month as the mix of content creators seems to be changing. Who would have thought just 3 years ago that Amazon would be vying for Emmy Awards? Or that YouTube wouldn’t just be repository of pirated video clips and homemade movies, but actually a news source more popular than the 3 major networks combined.

Now it appears that the very core of the content creation industry of the country, if not the world, is under an innovation attack. This in-depth article from Vanity Fair breaks it all down and exposes the realities of a broken system and the fact that most of the participants in that system don’t even know it is broken.

Yes, folks, the seeds of destructive innovation have already been sown. And thanks to the components of our Connected Society investment theme those seeds are being constantly watered and are sprouting up everywhere. Soon tourists could be going to Hollywood to see how TV shows and movies used to be made!

Musings on Apple’s “Record” December Quarter

Musings on Apple’s “Record” December Quarter

Last night Tematica Research Chief Investment Officer Chris Versace appeared on CGTN America’s Global Business program to talk about Apple’s (AAPL) December quarter earnings and several other topics. As CEO Tim Cook put it, “We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch…” which enabled the company to deliver better than expected revenue and earnings per share relative to Wall Street consensus expectations.

While Cook boasted of strong Apple Watch growth, iPhone shipments were up 5 percent year over year, hardly the robust growth levels we’ve seen in the past. Meanwhile, the Mac business — the next largest one next to the iPhone at just over 9 percent of total revenue — saw volumes rise 1 percent year over year, while iPad units fell 19 percent compared to the year-ago quarter. One bright spot in the company’s December quarter was Apple’s Services business, which rose 18 percent year over year and boasts more than 150 million paid customer subscriptions.

Circling back to that better than expected December quarter EPS, we’d be remiss if we didn’t point out Apple’s net income actually shrank year over year. If it weren’t for the company flexing its cash-rich balance sheet, which clocked in at $246.1 billion, to shrink the share count during 2017 Apple’s reported EPS would have been flat to down year over year instead of being reported up just under 10 percent. Coming into 2017, Apple has nearly $50 billion remaining on its current capital return program, which means more share repurchase activity is possible in the coming quarters.

One other sour point in the earnings report was Apple’s guidance for the current quarter, which fell shy of expectations. One particular call out was the impact of foreign currency, which is expected to be a ‘major negative’ as the company moves from the December to the March quarter.

The long and short of it is that while Apple CEO Tim Cook called it a record quarter, the reality is Apple’s financial performance remains closely linked to the iPhone, which still accounts for 70 percent of Apple’s overall business. To us here at Tematica this means until Apple can bring to market an exciting new product, or reenergize an existing one that can jumpstart growth, the company will be tied to the iPhone upgrade cycle. Expectations for the next iteration, the presumed iPhone 8, call for a new body, new display — hence  Disruptive Technology company Universal Display (OLED) being on the Tematica Select List — and a greater use of capacitive touch that should eliminate the current home button and bezel. But we’ll have to see if this new model on the 10th anniversary of the transformative device’s launch will capture the hearts of customers, as the last couple of models have only had a meh response.

Despite its current reliance on the iPhone, there are hopeful signs at Apple, such as the new AirPods that echo past design glory, an Apple TV business that has 150 million active subscriptions and a growing Services business. The issue is even if Apple doubled its service business in the coming year, it would still account for 15-20 percent of Apple’s overall revenue. Moreover, if that happened in the coming year it would likely mean the next iteration of the iPhone underwhelmed, something Apple is not likely to shoot for on the devices 10-year anniversary. Near-term, Apple is likely to remain a victim of its own success in creating one of the most loved and most used devices on the plant.

We’ll continue to keep tabs on this poster child company for our Connected Society investment theme company, but with no evident catalyst over the coming months, we’re inclined to be patient and pick off the AAPL shares at better prices.

 

Additional Thematic Data Points from Apple’s Earnings Announcement

While we are not quite buyers of Apple shares just yet, there was a number of confirming thematic data points shared during the company’s earnings conference call last night:

  • Rise & Fall of the Middle Class — “The middle class is growing in places like China, India, Brazil, but certainly, the strong dollar doesn’t help us.”
  • Cashless Consumption — “Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”
  • Content is King — “In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we’ll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of… with our toe in the water, we’re learning a lot about the original content business and thinking about ways that we could play at that.”
  • Connected Society — “every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States.

We’ll continue to look analyze management commentary for more thematic data points as more companies report their December-quarter earnings over the next few weeks.

 

 

Adding defensive measures as earnings season brings back volatility

Adding defensive measures as earnings season brings back volatility

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Our Thoughts on Connected Society Company
Apple’s “Record” Earnings

We wish we could say it’s been a quiet week since our last issue of Tematica Investing, a smooth sailing one in fact, but thanks to the growing political drama coming out of the new White House and a pick up in the velocity of earnings reports this week, the only word we can use to describe it is “frenetic.”

Last night I was a guest on CGTN America to discuss Apple’s (AAPL) quarterly results. The long and short of it is that while Apple CEO Tim Cook called it a record quarter, the reality is the iPhone still accounts for 70 percent of Apple’s overall business. While Cook boasted of strong Apple Watch growth, iPhone shipments were up 5 percent year over year, hardly the robust growth levels we’ve seen in the past.

Meanwhile, the Mac business — the next largest business line next to the iPhone — saw volumes rise 1 percent year over year, while iPad units fell 19 percent compared to the year-ago quarter. If Apple didn’t flex its cash position, which now sits at $246 billion, to buy back stock during the quarter, reported earnings would have been flat year over year.

To us here at Tematica this means until Apple can bring to market a new product, or reenergize an existing one that can jumpstart growth, the company will be tied to the iPhone upgrade cycle. Expectations for the next iteration, the presumed iPhone 8, call for a new body, new display — hence our position in Disruptive Technology company Universal Display (OLED) — and a greater use of capacitive touch that should eliminate the current home button. But we’ll have to see if this new model on the 10thanniversary of the transformative device’s launch will capture the hearts of customers, as the last couple of models have only had a meh response.

Despite Apple’s current reliance on the iPhone, there are hopeful signs in other areas, such as the new AirPods that echo past design glory, an Apple TV business that has 150 million active subscriptions and a growing services business. We’ll continue to keep tabs on this poster child company for our Connected Society company, but with no evident catalyst over the coming months, we’re inclined to sit patiently on the sidelines and pick off the AAPL shares at better prices.

In the meantime, our position in Universal Display (OLED), up 24 percent since initiating the position in October, gives us exposure to any Apple upside as the rumors persist it will integrate the OLED technology into the iPhone 8. As we often like to say — even though it’s somewhat politically incorrect in today’s hyper-sensitive world — “it’s better to buy the bullets, not the gun.”

  • Until there is more confirmation of the integation of OLED’s into the next iPhone, or another thematic tailwind reveals itself, we are maintaining a Hold rating on Universal Display (OLED) as the current price of $66 per share is close to our $68 per share target. 

 

Confirming Thematic Data Points From Earnings Reports and Other Sources

While we are not buyers of Apple shares just quite yet, there was a number of confirming thematic data points shared during the company’s earnings conference call last night:

  • Rise & Fall of the Middle Class — “The middle class is growing in places like China, India, Brazil, but certainly, the strong dollar doesn’t help us.”
  • Cashless Consumption — “Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”
  • Content is King — “In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we’ll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of… with our toe in the water, we’re learning a lot about the original content business and thinking about ways that we could play at that.”
  • Connected Society — “every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States. “

Aside from Apple, there has been no shortage of thematic data points buried in earnings reports over the last few days. Even though we cut Under Armour (UAA) from the Tematica Select List yesterday, we’d note its Direct to Consumer business, which reflects its online and mobile shopping efforts, rose 26 percent year over year in the December quarter. H&M Stores has announced it will slow its physical store openings and instead focus more of its efforts online.  Both confirming data points for our Connected Society investment theme.

Shifting gears somewhat, a new study from the Food Marketing Institute and Nielsen projects online grocery sales in the U.S. could grow tremendously in the next decade. By 2025, the report suggests that American consumers could be spending upwards of $100 billion on online grocery purchases, comprising some 20 percent of the total market share. Currently, 23% of US consumers purchase groceries through digital channels.

Confirming the accelerating shift toward digital shopping that is a hallmark of our Connected Society investing theme, during the December quarter United Parcel Service (UPS) saw its domestic average daily volumes rose 5% year over year with International domestic growth up more than 20% in Asia and 10% across the Eurozone. Noting the strong growth in Asia, we’d say it likely reflects the Rise aspects of our Rise & Fall of the Middle-Class thematic.

We expect to hear much more on the accelerating shift toward digital shopping when Amazon (AMZN) reports its quarterly earnings tomorrow (Feb. 2).

Getting back to Cashless Consumption, Juniper Research now expects $1.35 trillion to be spent worldwide through mobile wallets by the end of 2017. The nearly 30 percent increase over 2016 spending will be due to users in the Far East and China through Alipay and WeChat while Westerners continue to embrace mobile wallets from Apple Pay, MasterCard (MA) and PayPal.
Turning to our Fattening of the Population theme: 

  • McDonald’s (MCD) is deploying Big Mac vending machines… yes, we know what you’re thinking and there is no way we could make something like that up.
  • Civil servants in the UK have been warned that bringing cake into work for birthdays and celebrations could be a “public health hazard”. The Faculty of Dental Surgery at the Royal College of Surgeons (RCS) warned that in large offices, sweets and cakes have become a daily occurrence and the growing trend is contributing to poor oral health and the obesity epidemic. (There is a “bad teeth” joke somewhere in there, but for once we’ll take a pass on that one) On a serious note, sadly it seems that yes, despite what we may like to think, too much a good thing may not be good for us.

 

 
Hey Alexa, Order My Starbucks

Our most recent addition to the Tematica Select List was Disruptive Technologycompany Nuance Communications (NUAN) given the explosive growth that is expected in voice digital assistants over the coming years. We know that Starbucks (SBUX) has been an early adopter of technology that allows customers to pay and order ahead online with the Starbucks app. Starbucks Mobile Order & Pay currently accounts for more than 7 percent of transactions in US company-operated stores. Building on that, Starbucks has launched My Starbucks Barista, a voice-activated “barista” baked into the company’s existing iOS mobile app that uses artificial intelligence. Currently in beta testing, My Starbucks Barista will be available to 1,000 select US customers initially, with a planned rollout through summer 2017 and an Android version to follow.

As we pointed out when we added NUAN shares to the Tematica Select List, Amazon’s Echo technology is leading the way, and the same holds with Starbucks. Select customers can now use Amazon’s Alexa to order “on command”  and the ability to recall and repeat past favorite drinks is also included. Customers simply need to say “Alexa, order my Starbucks” from wherever they have an Alexa device.

As with My Starbucks Barista, we expect Starbucks will deploy this across more Echo devices in the coming months. What it means is more people adopting the use of voice technology, and we find that very bullish for our NUAN shares.

  • We continue to rate NUAN shares a Buy with a $21 price target, as well as Guilty Pleasure company Starbucks (SBUX) with a price target of $74.

 

 

Beholden to the All-Mighty Buck

Finally, one recurring standout this earnings season is the impact of currency given the dollar’s strength during 4Q 2016. We’ve heard it from Buy-rated McCormick & Co. (MKC), United Parcel Service (UPS) and others, but it was Apple that really hammered the point home. In the earnings call last night, Apple said, “we expect foreign exchange to be a major negative as we move from the December to the March quarter.” Not exactly a surprise, given that 60 percent of its revenue is from outside the US.

 

 

Housekeeping at the House of Mouse

While The Walt Disney Company (DIS) will not report its December quarter results until February 7, we’re boosting our protective stop loss on the shares to $101.50 from $87. Currently, we’re up 10 percent% on a blended basis with the shares and while we are enjoying that nice return, after languishing in the red for a while on the positions we are aware of how volatile earnings season can be. This move in the stop loss should prevent any losses in the Disney position on the Tematica Select List.

Why $101.50? Because our blended buy-in price is $101.50.

Even as we reset this stop loss level, we remain bullish on Disney shares given the slate of Marvel, Pixar and Star Wars films that will hit theaters in coming quarters. We are also encouraged by Disney’s other moves to spread the content wealth across its licensing and parks businesses as well as its exploration of streaming alternatives for ESPN.

  • As we boost our protective stop-loss on DIS to $101.50, our price target for the shares remains $125

 

 

Setting a Stop Loss on Facebook (FB) Shares

We’ve come to appreciate the volatile nature of corporate earnings season and we’re starting to see that once again these last few days. While we continue to see Facebook (FB) benefitting from its monetization efforts across its various social media platforms as advertisers embrace digital over radio, print and broadcast, we’ve noticed a something that could be a near-term issue. Over the last several weeks, we’ve noticed a shift toward people curbing their Facebook usage due to a growing sense of political outrage complete with over the top comments. This has prompted some to start referring to Facebook as “Hatebook”.

Our concern is all of this could lead to a softer short-term outlook than most might be expecting for the current quarter.

  • As such, we’re going to install a protective stop loss at $112 for our FB shares. Better to be prudent ahead of time, than sorry later is our thinking. 

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Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

This morning the US Bureau of Economic Analysis published its take on Personal Income & Spending for December. We’re rather fond of this monthly report given the data contained within and the implications for several of our investment themes, including Cash-strapped Consumers as well as Affordable Luxury and the Rise & Fall of the Middle Class. 

So what did the December report show?

Personal Income rose 0.3 percent, far faster than in November, but still below the 0.4-0.5 percentage gains registered in September and October. We saw the same pattern with Disposable Income (which is a better barometer for discretionary spending), as one would expect to see during the holiday shopping laden month of December.

That’s as good a segue as any to remind our readers that holiday shopping during November and December came in stronger than the National Retail Federation had forecasted. The final tally was a year over year increase of 4.0 percent compared to the NRF’s 3.6 percent forecast.

Now you’re probably saying to yourself, “How can that be given all the bad news that we’ve been hearing from Macy’s (M), Target  (TGT), Kohl’s (KSS), Sears (SHLD) and other brick and mortar retailers?”

To be honest, we doubt the average person would have thrown in the “other brick and mortar retailers” part, but we know our readers are smarter than the average bear.

The answer to that question is that non-store sales, Commerce Department verbiage for e-tailers like Amazon (AMNZ), eBay (EBAY) and digital Direct to Consumer business like those found at Macy’s, Under Armour (UAA), Nike (NKE) and other retailers, rose 12.6 percent year over year to $122.9 billion. We certainly like those stats as they confirm several aspects of our Connected Society investing theme, but we would argue a more telling take on the data is that non-store sales accounted for 19 percent of holiday shopping in 2016, up from 17 percent the year before. Nearly one-in-five shopping dollars was spent through online or mobile shopping.

We’ll get a better sense of this shift, which we only see as accelerating, later this week when both United Parcel Service (UPS) and Amazon report their quarterly results for the December quarter. Team Tematica will also be listening to Direct to Consumer comments from Under Armour and other apparel and footwear companies as they too report quarterly results over the next few weeks.

Now let’s take a look at December Personal Spending – it rose 0.5 percent, a tick higher than was expected. Given the NRF data above, it was rather likely we were going to get a better print vs. expectations.

In combining both the income and spending data for the month, we get the savings rate, which fell to 5.4 percent, a five-month low. Compared to a few years ago, that savings level looks rather solid even though it’s well below the longer-term trend line. What we do find somewhat disconcerting, given the prospects for the Fed to boost interest rates up to three times this year after only doing so just two times in the last two years, is the amount of revolving consumer debt outstanding. As evidenced in the graph below, those levels have continued to climb steadily higher during 2015 and 2016.

Should interest rates move higher in 2017, the incremental interest expense could crimp consumer wallets, reducing their disposable income in the process. To us, that could mean less Affordable Luxury or even Guilty Pleasure spending as more become Cash-strapped Consumers.

Voice Recognition Technology Hears Whispers of M&A

Voice Recognition Technology Hears Whispers of M&A

Earlier this month we had CES 2017 in Las Vegas, a techie’s mecca of new whiz-bang products set to hit the market, in some cases later this year, but in others in 2018 and beyond. A person tracking the CES trade shows over the years likely remembers the changes in inputs from clunky keyboards and standalone number pads to rollerball driven mice to laser based ones, which gave way to trackpads and touchscreen technology. Among the sea of announcements this year, there were a number that focused on one aspect of our Disruptive Technology investing theme that is shaping up to be the next big change in interface technology — voice recognition technology.

Over the years, there have been a number of fits and starts with voice technology dating all the way back to 1992 when Apple’s (AAPL) own “Casper” voice recognition system that then-CEO John Sculley debuted on “Good Morning America.” As the years have gone by and the technology has been further refined, we’ve seen more uses for voice recognition technology in a variety of applications and environments ranging from medical offices to interacting with a car’s infotainment system. As far back as 2004, Honda Motor’s (HMC) third generation Acura TL sported an Alpine-designed navigation system that accepted voice commands. No need to press the touchscreen while driving, just use voice commands, (at least that was the dream — but for those of us that tried to change the radio station and ended up switching the entire system over to Spanish, it wasn’t so useful!)

More recently with Siri from Apple, Cortana from Microsoft (MSFT), Google Assistant from Alphabet (GOOGL) and Alexa from Amazon (AMZN) we’ve seen voice recognition technology hit the tipping point. Each of those has come to the forefront in products such as the Amazon Echo and Google Home that house these virtual digital assistants (VDAs), but for now, one of the largest consumer-facing markets for voice interface technology has been the smartphone. Coming into 2016, market research and consulting firm Parks Associates found that nearly 40 percent of all smartphone owners use some sort of voice recognition software such as Siri or Google Now.

In 2016, the up and comer was Amazon, as sales of its Echo devices were up 9x year over year this past holiday season and “millions of Alexa devices sold worldwide this year.” If you’re a user of Amazon Echo like we are, then you know that each week more capabilities are being added to the Alexa app such as ordering a pizza from Dominos (DPZ), calling for an Uber, checking sports scores, shopping with your Amazon Prime account, hearing the local weather forecast and getting the latest news or perhaps some new cocktail recipes.

Not resting on its laurels, Amazon continues to expand Echo’s capabilities and announced that Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot. Once an order is placed, Amazon delivery partners deliver the food in one hour or less. Pretty cool so long as you have Amazon Restaurants operating in and around where you live. We’d point out that since you’re paying with your Prime account, which has a credit card on file, this also expands Amazon’s role in our Cashless Consumption investment theme as does Prime Now which lets Prime members in cities in which the service is available get deliveries in under two hours from Amazon as well as from local participating stores.

But we digress…

Virtual digital assistants cut across more than just smartphones and devices like Amazon Echo and the Google Home. According to a new report from market intelligence firm Tractica, while smartphone-based consumer VDAs are currently the best-known offerings, virtual assistant technologies are also beginning to emerge within other device types including smart watches, fitness trackers, PCs, smart home systems, and automobiles – hopefully, this time not switching us into Spanish.

We saw just that at CES 2017 with some landscape changing announcements for VDAs such as withAlphabet that had several announcements surrounding its Google Home product, including integration into upcoming Hyundai and Chrysler models; and acquiring Limes Audio, which focuses on voice communication systems, and will likely be additive to the company’s Google Home, Hangouts and other products. Microsoft also scored a win for Cortana with Nissan.

While those wins were impressive, the big VDA winner at CES was Amazon as it significantly expanded its Alexa footprint on deals with LG, Dish Network (DISH), Whirlpool (WHR), Huawei and Ford (F). In doing so Amazon has outflanked Alphabet, Microsoft and even Apple in the digital assistant market, but then who doesn’t find Siri’s utility subpar? To us, that’s another leg to the Amazon stool that offers more support to the share alongside the digital shopping/services, content, and Amazon Web Services businesses.

To be fair, Apple originally did not license out its Siri technology. It was only in June 2016 that Apple announced it would open the code behind Siri to third-party developers through an API, giving outside apps the ability to activate from Siri’s voice commands, and potentially endowing Siri with a wide range of new skills and datasets, potentially making a mistake similar to the one that originally cost Apple the Operating System market to Microsoft. Amazon, on the other hand, has been eager to bring other offerings onto its Alexa platform.

Tractica forecasts that unique active consumer VDA users will grow from 390 million in 2015 to a whopping 1.8 billion worldwide by the end of 2021 – Juaquin Phoenix’s Her is closer than you’d think!  During the same period, unique active enterprise VDA users will rise from 155 million in 2015 to 843 million by 2021.  The market intelligence firm forecasts that total VDA revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021.

In the past when we’ve seen new interface technologies come to market and move past their tipping point, we tended to see slowing demand for the older input modalities. Case in point, a new report from Technavio forecasts compound annual growth of just 3.63 percent for the global computing mouse market between 2016-2020. By comparison, Global Industry Analysts (GIA) expects the global market for multi-touch screens to reach $8 billion by 2020 up from $3.5 billion in 2013, driven by a combination of mobile computing and smart computing devices. For those who are less than fond of doing time calculations, that equates to a compound annual growth rate of 11 percent. We’d also point out that’s roughly half the expected VDA market in 2021.

One potential wrinkle in that forecast is the impact of VDAs. Per eMarketer, 31 percent of 14-17-year-olds and 23 percent of 18-34-year-olds regularly use a VDA.

Putting these two together, we could see slower growth for touch-based interfaces should VDA adoption take off. Looking at the recent wins by Amazon and Google, factoring in that Apple and Comcast (CMCSA) are favoring voice technology in Apple TV and XFINITY TV and growth in the smartphone market is stalling, there is reason to think the GIA forecast could be a tad robust, especially in the outer years.

Turning our investing gaze to companies that could be vulnerable should the GIA forecast prove to be somewhat aggressive, we find Synaptics (SYNA), whose tag line is “advancing the human interface,” and the “human machine interface” company that is Alps. Both of these companies compete in the smartphone, wearables, smart home, access control, automotive and healthcare markets — the very same markets that are ripe for voice technology adoption.

From a strategic and thematic perspective, one could see the logic in Synaptics and Alps looking to shore up their market position and customer base by expanding their technology offering to include voice interface. Given the head start by Apple, Alphabet, Microsoft, and Facebook, while Synaptics and Alps could toil away on “made here” voice technology efforts, the time-to-market constraints would make acquiring a voice technology company far more practical.

Here’s the thing, we’ve already seen Alphabet acquire Limes Audio to improve its voice recognition capabilities. As anyone who has used Apple’s Siri knows, it’s far from perfect in voice recognition and voice to text. In our view, this means larger players could be sniffing around voice technology companies in the hopes of making their VDAs even smarter.

In many respects we’ve seen this before whenever a new disruptive technology takes hold alongside a new market opportunity — it pretty much resembles a game of M&A musical chairs as companies look to improve their competitive position. In our view, this means companies like Nuance Communications (NUAN), VoiceBox, SoundHound, and MindMeld among other voice technology companies could be in high demand.

Disclosure: Nuance Communications (NUAN) shares are on the Tematica Select List. Both Nuance Communications and Synaptics, Inc. (SYNA) reside in Tematica’s Thematic Index.

Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

There is little question that streaming content is altering the playing the field, not just how people consume audio and video content, but increasingly where certain content can be found. First, it was movies, then TV shows, but as back catalogs were seemingly pervasive, streaming services like Netflix, Hulu, and Amazon have looked to differentiate themselves through proprietary content. It used to be as Bruce Springsteen sang, “57 channels and nothin’ on,” but that has morphed into hundreds of channels that need to be filled. The end result is an arms race for quality content that is likely to hasten the switch to streaming video services from traditional broadcast and cable networks. If asked, “What’s wrong with that?” for Seinfeld jumping ship to Netflix, we would say nothing… nothing at all.

Jerry Seinfeld is headed for Netflix.The comedian has signed a multifaceted production deal with the streaming giant, The Hollywood Reporter has learned. Under the pact, Seinfeld’s award-winning Crackle series Comedians in Cars Getting Coffee will move with new episodes to Netflix, with the comedian also set to film two new stand-up specials exclusively for the streamer.

The Seinfeld deal marks the latest investment in comedy for Netflix, which also shelled out $20 million each for a pair of Chris Rock stand-up comedy specials. Netflix’s entry into the stand-up space has created a growing arms race to land top talent in an increasingly competitive landscape against featured players Comedy Central, Showtime and HBO, among others. Other comedians who recently have gone to Netflix include Amy Schumer, who made a name for herself via Comedy Central, and Dave Chappelle.

The deal is a blow to Sony Pictures Television’s little-watched streaming service Crackle, which had been the exclusive home for Comedians in Cars, with Seinfeld’s deal with the independent studio expiring.

Source: Jerry Seinfeld Teams With Netflix for Two Stand-Up Specials, More ‘Comedians in Cars’ | Hollywood Reporter