Menu
WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

Welcome to this week’s issue of Tematica Investing, where we leverage our proprietary thematic lens to invest in well-positioned companies when it comes to our investment themes.

Over the last week, we’ve seen one of the best starts to a new trading year in some time, and the Tematica Investing Select List has been benefitted from not only that start but news being made at the currently occurring annual technology tradeshow better known as CES 2018. I’ll recap some of the meaningful announcements below in a minute, but the impact of those results have moved our positions in Universal Display (OLED), Applied Materials (AMAT), Nokia (NOK) and AXT Inc. (AXTI) higher over the last week.

These moves and the causes behind them have me once again revisiting my price targets on OLED and AMAT shares to the upside. Confirming data will likely be had in the coming days as 4Q 2017 earnings begin in earnest next Tuesday. As I discussed in this week’s Monday Morning Kickoff, the likely scenario is we see U.S. listed companies offer an upbeat outlook and use the benefit to be had from tax reform to boost 2018 EPS expectations. On an annual basis, those tax reform related benefits should more than outweigh the cold snap weather and winter storm Grayson disruptions that we have likely encountered with restaurant, retail and construction companies. This means that at least in the near-term investors will need to be choosey, hwoever, the net effect should see the stock market melt higher, especially if more Wall Street strategists boost their price targets for the S&P 500, the proxy for the overall U.S. stock market. I expect this to be the likely scenario.

My perspective that I laid our in this week’s Monday Morning Kickoff remains – I continue to suspect expectations could be getting ahead of themselves given the recent climb in consumer debt levels and continued growth in the lack of qualified workers that could hamstring business investment in the coming months despite lower taxes. The strategy that we’ll follow near term is to listen to the data and look for opportunities – companies at prices that offer a skewed risk-to-reward proposition that is in our favor. It has been that discipline married with Tematica’s thematic lens that has steered us clear of such 2017 disasters as GoPro (GPRO) and Blue Apron (APRN).

 

Watching the Fed minutes this afternoon

Later today, we will receive the next iteration of the Fed’s FOMC meeting minutes. While we know the policy impact from the December meeting, I’ll be interested in seeing more on to what degree the Fed factored in tax reform into its GDP forecasts, and what it sees as some of the swing factors to watch.

 

A first pass from CES 2018

While CES 2018, the annual technology trade show held in Las Vegas that features more than 4,000 exhibitors, officially got underway yesterday, we’ve received a number of announcements in the last few days that have sent tech shares in general, and several of our holdings, higher.

Starting with TVs, which are one of the more high-profile items to kick off the annual gathering, we are starting to see artificial intelligence (AI) embedded into these devices. For example, is adding both Alphabet’s (GOOGL) Google Assistant and Amazon’s (AMZN) Alexa to its latest 4K OLED and Super UHD LCD TV lineup. But TVs aren’t the only things that will embed AI in the coming year – yesterday it was announced by Moen that its cloud-based, Wi-Fi enabled shower system “U by Moen” will add support for Apple’s Siri and Amazon’s Alexa AI assistants in the first half of 2018.

Outside of Moen, both Kohler and Whirlpool (WHR) are also bringing voice activation capabilities to their smart kitchen, bath and appliance products. No stranger to voice assistants in its products, Whirlpool is going one step further as the appliances it is debuting at CES this year can be controlled using Alexa or Google Assistant. Per Whirlpool, its offering includes “dishwashers that can be set and started remotely by voice, refrigerators that homeowners can change temperature settings on using a voice assistant, and washing machines that let the user check with Alexa to see how much time is left on a cycle.”

We’re also seeing connectivity make its way into toothbrushes courtesy of Colgate’s (CL) Smart Electronic Toothbrush uses Apple ResearchKit with the user’s permission to crowdsource toothbrushing data so the company can “anticipate the future of oral care.”

This is a first pass at the CES news flow and I’ll have more over the coming days, so be sure to check back at TematicaInvesting.com for those thoughts.

Stepping back we find the rising number of connected devices – be they through voice assistants, smartphones or other – driving incremental demand for RF semiconductors. This, in turn, bodes very well for incremental substrate demand for AXT’s (AXTI), the basic building block for RF semiconductors from the likes of Skyworks Solutions (SWKS), Qorvo (QRVO) and others.

That is poised to drive semiconductor manufacturing utilization rates higher and bodes well for incremental orders at semi-cap company Applied Materials (AMAT), which is also benefitting from the ramp in organic light emitting diode display demand I noted above. With AMAT shares trading at just 13.5x on expected 2018 earnings, I’m once again reviewing my $65 price target with an upward bias.

I also see Amazon making a significant “land grab” with its Alexa voice assistant, which, in our view, bodes very well for continued growth in Amazon’s Prime membership and the company capturing consumer wallet share.

  • We continue to rate AXT Inc. (AXTI) shares a Buy at current levels and our price target remains $11.
  • We continue to rate Applied Materials (AMAT) shares a Buy at current levels and our price target remains $65.
  • We continue to have a Buy on Amazon (AMZN) shares, and our price target remains $1,400.

 

 

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.

 

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.