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The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

After days of speculation, Content is King champ Walt Disney (DIS) formally announced it was acquiring the film, television and international businesses of Twenty-First Century Fox Inc (FOXA) for $52.4 billion in stock. Viewed through our thematic lens, Disney is once again expanding its content library, which means that finally the X-Men and other characters will be reunited with their Marvel brethren under one roof. As the inner comic book geek in me sees it, perhaps we will know get the X-Men movie we deserve.

While I only half kid about the comic book potential of the deal, the reality is the transaction expands Disney’s reach to include movies, TV production house, a 39% stake in Sky Plc, Star India, and a lineup of pay-TV channels that include FX, National Geographic and regional sports networks. Via a spinoff, Rupert Murdoch will continue to run Fox News Channel, the FS1 sports network and the Fox broadcast network in the U.S.

Viewing the combination through our Connected Society thematic lens, we see the move by Disney as solidifying not only its streaming content business but its streaming platform potential as well. Recently Disney shared that over the next few years it would launch its own streaming services, one for Disney content and one for ESPN, in order to better compete with frenemy Netflix (NFLX), Amazon (AMZN) and other streaming initiatives at Alphabet (GOOGL), Facebook (FB) and the burgeoning one at Apple (AAPL). Let’s remember these streaming services are all embracing our Content is King investing theme as they bring their own proprietary content to market to lure new subscribers and keep existing ones. We have previously shared our view that we are in a content arms race, and acquiring these Fox assets certainly adds much to the Disney war chest once the deal is completed in the next 12-18 months.

The added Connected Society benefit to be had in acquiring Fox is it ups Disney to a controlling interest in streaming service Hulu, which has roughly 12 million streaming subscribers and 250,000 subscribers for its new live TV streaming offering — the online TV package that replicates a small cable bundle. Hulu used to have three different bosses — Disney, Fox, and Comcast (CMCSA) — each owning an equal stake. Following the Disney-Fox deal, odds are Comcast’s role in Hulu will diminish and over time I would not be surprised to see Disney acquire that ownership piece as well. What this does is quickly lay a solid foundation for Disney’s streaming service plans, and I would not be shocked to see Disney convert Hulu into its own branded streaming service once the Fox acquisition closes.

From a thematic investing perspective, the Disney-Fox combination is a win-win on several levels, even though Disney is spending quite a bit of capital to get it done. The reality is there is no better company at monetizing its content and squeezing dollars from consumer wallets and in the coming quarters, Disney will have two very strong thematic tailwinds behind it — a more solidified Content is King tailwind and a burgeoning Connected Society tailwind keeping its sails full.

Near-term, this weekend is the domestic opening of the next Star Wars movie – initial reviews are very positive and advance ticket sales indicate a $200 million opening weekend or better.

  • We continue to rate Disney (DIS) shares a Buy, and our long-term price target remains $125

 

Special Alert: Tematica’s take on Trade Desk earnings

Special Alert: Tematica’s take on Trade Desk earnings

 

Last night recently added Connected Society / Content is King company Trade Desk (TTD) reported results that beat September quarter expectations. However, after several “beat and raise” quarters, TTD shares were trading off in the aftermarket last night and again in pre-market trading this morning due to “underwhelming” revenue guidance — guidance that was modestly short of consensus expectations. For the current quarter Trade Desk guided revenue to $101 million, while the consensus forecast was $101.6 million. For those doing the math, yes that’s a variance of less than 1% — a variance on guidance, not a variance of actual results, Still, TTD shares are down more than 11%.

What’s going on?

As we mentioned when we added Trade Desk shares earlier this week to the Tematica Investing Select List, the company has a reputation for “beating and raising”.  While it clearly beat September quarter expectations that were looking for EPS of $0.26 on revenue of $76.8 million last night with EPS of $0.35 on revenue of $79.4 million, the guidance, which is likely to prove to be conservative in our view is the issue. Plain and simple, Trade Desk management did not boost its outlook for the current quarter above the consensus view, and that is catching some investors off guard.

We’ve seen this before when a company that has a track record of raising expectations quarter after quarter, suddenly doesn’t follow the expected playbook. Some investors panic and sell thinking “things must be over” or “something is wrong.”

In our experience, more often than not, what we are seeing in Trade Desk — a company that is benefitting from the accelerating shift in advertising spend to digital platforms — is simply re-casting the expectations bar so it can continue to walk over it, beating expectations in the process. To use Wall Street lingo, we suspect Trade Desk is sandbagging the current quarter in order to keep its “under promise and over deliver” reputation intact. While it’s not fun in the short-term, such actions that drive a stock’s price lower offers us an opportunity to improve our cost basis at better prices as we scale into the position.

When we added the shares, we mentioned that there was the chance that Trade Desk could deliver a flub. We didn’t think it was likely, and the performance in the September quarter was robust — a quarter that showed 95% customer retention as well as solid growth across mobile, international and other advertising platforms including audio the underlying business. On the earnings conference call, Trade Desk shared it added “3 large global brands” during the quarter with spending in the test phase.

What this tells us is Trade Desk continues to gain advertising spend share as companies continue to look for ways to reach consumers in today’s increasingly connected and digital world. Considering how brand conscious companies are, and rightly so, we see it as a huge vote of confidence that Trade Desk continues to win and retain customers.

 

Here’s our strategy for TTD shares

Our strategy with Trade Desk shares will be to remain patient with our current shares and sit on the sidelines in the very short-term while sellers weigh down on the stock price. In relatively short order, we expect to be in a position to step in and add to our position at better prices given that we see no slowdown in the shift toward digital advertising.

If there was any doubt, all we need do is look at where people are spending their time — on connected devices. While there may be some bumps along the way, we see this creative destruction in how and where advertising spend occurs as 2.0 version of how the internet impacted newspaper advertising. There is no putting the genie back in the battle, especially as video consumption shifts from broadcast to streaming services, with more players ranging from Facebook (FB), Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL) getting involved. If anything, we see advertisers pivoting toward Trade Desk.

 

 

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

A few days ago in the Monday Morning Kickoff, I cautioned that over the coming days we would see a profound increase in data in the form of economic data and earnings. We are seeing just that as we head into the eye of the earnings storm today and tomorrow. For the Tematica Investing Select List that means results will be had from Connected Society company Facebook after today’s market close, followed tomorrow by Disruptive Technologies company Universal Display (OLED) and the latest addition – Apple (AAPL). Yes, after patiently keeping our eyes on Apple for some time, we finally added the shares back to the Select List given what we see as a robust 2018 for the company. If you missed our deep thoughts on that addition you can find it here, and below we’ve previewed what’s expected from these three companies.

We all know there are a number of factors that influence the market, and two of them – the Fed and prospects for tax reform – will be in full coverage today and tomorrow. This afternoon the Fed will break from its November FOMC policy meeting, and while next to no one expects the Fed to boost interest rates coming out of it, the focus will be the language used in the post-meeting statement. Last week’s stronger than expected 3Q 2017 GDP print of 3.0% — you can read Tematica’s take on that here – and Fed Chairwoman Janet Yellen’s likely status as a lame duck keep the prospects of a rate hike in December fairly high in our view.

Tomorrow, the highly anticipated tax reform bill is slated to be revealed, a day later than expected “because of continued negotiations over key provisions in the bill.” It’s being reported that issues still being negotiated include retirement savings and the state and local tax deduction — two key provisions that involve raising revenue to pay for the plan. As the bill’s details are released, we suspect many will be interested in proposed tax bracket changes and the potential economic impact to be had as well as near-term implications for the national debt. We will have more comments and thoughts on the proposed bill later this week as it, along with the tone of earnings to come, will influence the market’s move in the coming days.

 

A quick reminder on Amazon and Nokia plus boosting our Alphabet price target

Before we preview what’s to come later today and tomorrow, I wanted to remind you that last week, on the heels of Amazon destroying 3Q 2107 expectations, we boosted our price target for AMZN shares to $1,250 from $1,150, keeping our Buy rating intact. As expected, other investment banks and analysts did indeed up their rating and price targets as we move deeper into what is poised to be one of the busiest quarters in Amazon’s history. The wide consensus is that once again digital shopping will take consumer wallet share this holiday season. As Amazon benefits from that e-commerce tailwind following robust Prime membership growth in 3Q 2017, the company is also poised to see its high margin Amazon Web Services business continue to benefit from ongoing cloud adoption. In our view, this combination makes Amazon a force to be reckoned with this holiday season, especially since it remains the online price leader according to a new report from Profitero.

  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.
  • Our price target on Amazon is $1,250.

 

We also used the sharp sell-off in Nokia (NOK) shares to scale into that position as its high margin licensing business continues to perform as its addressable device market continues to expand. That addition helped improve our NOK cost basis considerably as we patiently wait for the commercial deployment of 5G networks that should goose its network infrastructure business. Hand in hand with those deployments, we should see even further expansion of Nokia’s licensing market expand as the connected car, connected home and Internet of Things markets take hold.

  • We continue to rate Nokia (NOK) shares Buy with an $8.50 price target.

 

Also last week, Alphabet (GOOGL) soared following the company’s 3Q 2017 results that crushed expectations and confirmed the company’s position in mobile. More specifically, the company delivered EPS of $9.57, $1.17 per share better than expected, as revenue climbed nearly 24%, year over year, to $27.77 billion, edging out the expected $27.17 billion.

Across the board, the company’s metrics for the quarter delivered positive year-over-year comparisons and in response, we are upping our price target to $1,150 from $1,050. Given its positions in search, both desktop and mobile, the accelerating shift in advertising dollars to digital platforms, and YouTube’s move into both streaming TV and proprietary programming, we continue to rate GOOGL shares a Buy.

  • We are upping our price target on Alphabet (GOOGL) shares to $1,150 from $1,050.

 

After today’s market close, Facebook will report its 3Q 2017 results

Following positive reports from Amazon, Alphabet and even Twitter (TWTR) that confirmed the accelerating shift to digital platforms for advertising and consumer spending, Facebook shares rallied in tandem over the last few days. This brings the year-to-date rise in the shares to more than 55% fueled in part by several investment banks upping their price targets and ratings for the shares. For now, our price target on FB shares remains $200.

Despite the better-than-expected results from those companies mentioned above, we have not seen any upward move in consensus expectations for Facebook’s 3Q 2017 results that will be reported after today’s market close. As I share this with you, those expectations for 3Q 2017 sit at EPS of $1.28 on revenue of $9.84 billion while those for the current quarter are $1.70 in earnings and $12 billion in revenue. On the earnings call, we’ll be looking not only for updated quarterly metrics but also updates on its monetization efforts and how its video streaming offering, Watch, is developing. We see Watch as a salvo against TV advertising given its 2 billion-and-growing user footprint across the globe. We also hope to hear more about Facebook’s virtual reality initiatives and its plan to expand the recently launched online food-ordering capability.

  • As Facebook continues to garner advertising dollars and flexes its platforms to gather more revenue and profit dollars, we are once again assessing potential upside to our $200 price target for this Connected Society company

 

Thursday brings Apple and Universal Display earnings

After tomorrow’s market close we receive earning from Disruptive Technology company Universal Display (OLED) and Connected Society company Apple (AAPL). There have been a number of positive data points to be had for our Universal Display shares over the last several weeks and they have propelled the shares higher by 13% over the last month. That latest move has brought the return on the OLED position that we have had on the Tematica Investing Select List since October 2016 to more than 175%. Patience, it seems, does pay off as does collecting and assessing our thematic signals.

In terms of 3Q 2017, consensus expectations call for the company to deliver EPS of $0.12 on revenue of $47.1 million. We’d remind subscribers the company has a track record of beating expectations and a favorable report this week from LG Display points to that as once again being likely tomorrow.

As noted by LG Display, “Shipments of big OLED TV panels have increased, as 13 manufacturers adopted our products…We plan to focus on investing in OLED products as part of our long-term preparation for the future” away from LCD displays. LG Display also shared it is planning to spend 20 trillion won to expand OLED production through 2020.

We see this rising capacity as bullish for our Universal shares as well as our Applied Materials (AMAT) shares given its display equipment business, but also as a signal that OLED display demand is poised to expand into other markets, including automotive.

  • Our price target on Universal Display shares remains $175.
  • Our price target on shares of Applied Materials (AMAT) remains $65.

 

With regard to Apple’s 3Q 2017 earnings, expectations have this Connected Society company reporting EPS of $1.87 on revenue of $50.8 billion. As we mentioned when we added the position, given the timing of both new iPhone model launches we are likely to see 3Q 2017 results get a pass as investors focus on the outlook for the current quarter. As I shared on Monday, our strategy will be to use any pullback in AAPL shares near the $140-$145 level to improve our cost basis for what looks to be a favorable iPhone cycle in 2018.

  • Our price target on Apple (AAPL) remains $200.
Weekly Issue: Keeping our eye on the ball as the market gyrates on earnings of the day

Weekly Issue: Keeping our eye on the ball as the market gyrates on earnings of the day

As we mentioned in this week’s Monday Morning Kickoff, we are indeed heading deeper into 3Q 2017 earnings season and that means the pace of reports is going to pick up with each passing day. On Monday, I shared which companies on the Tematica Investing Select List will be reporting earnings this week as well as how the Wall Street herd is catching up to our bullish thoughts on Cash-Strapped Consumer investment theme company Costco Wholesale (COST) and Disruptive Technology investment theme company Applied Materials (AMAT).

Yesterday I shared my thoughts on why subscribers should NOT catch the falling knife that is Blue Apron (APRN) shares – in a nutshell,  Blue Apron is facing too many thematic headwinds and other issues after recently going public. My analysis also suggests a painful secondary offering is in the cards for this company, and my thought is we should sidestep this ongoing disaster and fish in more fruitful waters. Also yesterday, Disruptive Technology investment theme company Corning (GLW) issued solid results and an upbeat outlook that moved the shares higher – more thoughts on that below.

 

 

Taking a Higher View of the Market

What we are currently seeing is a day to day fluctuation in the stock market based on the earnings reports of the day. Last Friday, General Electric (GE), Proctor & Gamble (PG) and Honeywell (HON) weighed on the market. That same downward pressure continued on Monday following results from Whirlpool (WHR). Yesterday, positive quarterly results from Caterpillar (CAT) and 3M (MMM) had the major market indices retracing their way higher. As these market moves occurred, I’d note U.S. Treasury yields hit their highest since March, but at the same time, CNNMoney’s Fear & Greed Index has continued to climb higher into Extreme Greed.

What this tells us is the market is likely to be somewhat schizophrenic based on what it hears. As the frequency of reports spikes later this week and next week, we are bound to see some wobbles in the market. Keep in mind that tomorrow (Thursday, October 26th), we will see more than 340 companies report, including Amazon (AMZN) and Alphabet (GOOGL), and those will set the tone for how the markets finish out the week.

As the litany of reports is had over the next 13 trading days, we’ll continue to use our thematic lens to ferret out confirming data points and examine new positions for the Tematica Select List. As we do this, we’ll look for opportunities to improve our cost basis in existing Select List positions, and, if need be, jettison any that are seeing their thematic tailwinds become headwinds.

 

 

Solid earnings from Corning, keeps our Buy rating intact

Yesterday, Disruptive Technology investment theme company Corning (GLW) reported 3Q 2017 results that were ahead of expectations and the company offered an upbeat outlook for what’s ahead in the coming quarter but fell shy of issuing formal guidance. For the quarter, the company reported EPS of $0.43 vs. the expected $0.41 on revenue that was modestly better than expected — $2.61 billion vs. the consensus expectation of $2.59 billion.

Parsing through the report, nearly every Corning business segment reported sequential revenue and earnings improvement with one exception. That exception would be the company’s core Display business, which while second from a revenue percentage basis behind Optical Communications, is the clear profit breadwinner for the Corning. As a reminder, these two businesses — Display and Optical Communications — account for the bulk of Corning’s sales and earnings, roughly 67% of sales and 74% of operating profits. As such, these are the two key drivers of the company’s performance and the ones we will continue to focus on.

If there was one wrinkle in the report, it was that recent wins in the Display business unit led to Corning’s operating profit to slip year over year. The sequential ramp in operating expenses for the Display business is tied to the launch of its Gorilla Glass. This new product is not only a key stable of smartphones like Apple’s (AAPL) iPhone, but Corning is launching it into new markets and applications such as gasoline particulate filters, pharmaceutical glass packaging, and other automotive applications, including replacing the conventional auto glass. Walmart (WMT) recently introduced a new line of screen protectors under the name Blackweb, which uses Corning glass. And the company continues to garner wins at smartphone OEMs in emerging regions including new devices at Positivo in Brazil, LAVA in India and Polytron in Indonesia.

All of these new wins led to a sequential dip in margins for the Display business unit. We expect, however, for margins to rebound as start-up expenses associated with these recent wins fade in the coming quarters. That fade was offset by profit improvements in the company’s other businesses, especially Specialty Materials, that led to the sequential profit improvement reported by Corning.

Now, you’re probably thinking – how did the company deliver an EPS beat when its operating profit fell?

The answer is in its active buyback program, which shrank the outstanding shares by more than 8% year over year. Since announcing its plan to return more than $12.5 billion plan to shareholders in the form of stock repurchases and dividends, Corning has already returned $8.5 billion by shrinking its outstanding shares by nearly 30%, increased its dividends twice in as many years and intends to increase the dividend by at least 10% annually in 2018 and again in 2019.

When we added GLW shares to the fold exactly a month ago, we noted the company had a robust plan to return capital to shareholders. Today’s report shows the company is on track with that plan, and we suspect the management will highlight this progress on the earnings call.

All in all, we would sum the report up as being solid and expected, something investors like. We continue to see larger format displays sizes for TVs and smartphones as well as the adoption of newer connected devices in cars, homes and on people spurring demand for the company’s Display business. We also see a similar pick up in demand for the company’s Optical Fiber business as 5G wireless networks transition from beta to commercial deployments.

  • We continue to rate Corning (GLW) shares a Buy with a $37 price target.

 

 

 

 

 

Investing herd continues to catch up to us

Investing herd continues to catch up to us

Over the weekend I was doing my usual reading and noticed our positions in both Costco Wholesale (COST) and Applied Materials (AMAT) received favorable mentions in Barron’s. I always say it’s nice to see the herd catching up to what we’ve been seeing and saying, and these two articles are just the latest. As we shared in this week’s Monday Morning Kickoff, we are heading hip deep into 3Q 2017 earnings season. Thus far, we have been observers, but that will change this week when a number of companies on the Tematica Investing Select List report their quarterly results and update their outlook for the current quarter.

 

Costco Wholesale – Oppenheimer misses the real EPS generator

In Costco: 5 Reasons to Load Up digs into Oppenheimer’s Buy rating on COST shares and its $185 price target, which is in line with our price target. Candidly, while we agree with several of the presented points, we find it somewhat confounding that Costco’s continued footprint expansion, a key driver of very profitable membership fee income was not mentioned. While we could chalk it up to not really understanding how the company derives its overall profits and EPS, we’ll take the high road and say they did focus on reasons why the recent pullback in COST shares due to the perception of e-commerce threats is overblown.

 

 

Applied Materials – Semi-cap is strong, but let’s not forget about Display

Turning to Applied Materials, it was included in 4 Cheap Stock Picks for the Impatient article even though AMAT shares have been on a tear throughout 2017. The article rightly discussed one of the key drivers of rising semiconductor capital equipment demand:

It bodes well that China is rapidly building a chip industry, and must stock its factories with new machines, while new applications, including artificial intelligence and machine learning, are expanding the world-wide market for chips.

But, the article failed to mention the growing demand for Applied’s Display Business that is benefitting from the ramp in organic light emitting diode displays, which is also benefitting our Universal Display (OLED) shares. With both businesses firing, and following an upbeat outlook from semi-cap competitor Lam Research (LRCX), we remain bullish on AMAT shares. Our price target now stands at $65, but we suspect that as demand for its products continues to climb in 2018 there is likely another price increase to be had in the coming months.

  • Our price target on Applied Materials (AMAT) shares is $65.
  • Our price target on Universal Display (OLED) shares is $175.

 

This week’s earnings calendar

As I mentioned above, we are no longer passive observers this earning season as we have 6 companies on the Tematica Select List reporting this week. Here’s a quick rundown of when those companies will report and current consensus expectations. As you might expect, we’ll have color commentary on these reports, especially those that require us to take any action.

Tuesday, October 24

Corning (GLW; Disruptive Technology) – Consensus expectations call for this glass company that serves display and fiber markets to deliver EPS of $0.41 on revenue of $2.6 billion. Our price target is $37.

 

Wednesday, October 25

AXT Inc. (AXTI; Disruptive Technologies): Consensus expectations call for the RF semiconductor and fiber building block company to deliver EPS of $0.09 on $27 million in revenue. Our price target is $11

 

Thursday, October 26

Alphabet (GOOGL; Asset-Lite) – Consensus expectations have this internet search and digital advertising company earnings EPS of $8.33 on revenue of $27.2 billion for the quarter. Our price target is $1,050.

Amazon (AMZN; Connected Society) – Consensus expectations for the company we consider the poster child for thematic investing to deliver EPS of $0.03 on revenue of $42 billion, up almost 29% year over year. Our price target is $1,150.

Nokia Corp. (NOK: Asset-Lite – Consensus expectations have this wireless infrastructure, connected device and intellectual property company earnings EPS of $0.06 on revenue of $6.35 billion for 3Q 2017. Our price target stands at $8.50.

United Parcel Service (UPS; Connected Society) – This e-commerce delivery solutions company is slated to deliver EPS of $1.45 on revenue of $15.6 billion. Our price target on UPS shares remains $130.

 

 

Boosting Price Target on UPS Shares Amid eCommerce Surge

Boosting Price Target on UPS Shares Amid eCommerce Surge

Key Points from this Post:

  • We are boosting our price target on United Parcel Service (UPS) shares to $130 from $122. Our new price target is a tad below the high end of the price target range that clocks in at $132, and offers an additional 7.6% upside from current levels.
  • As additional holiday sales shopping forecasts are published, we’ll be double and triple checking our UPS price target for additional upside.
  • Our price target on Amazon (AMZN) shares remains $1,150.
  • Our price target on Alphabet (GOOGL) shares remains $1,050

 

We have long said that United Parcel Service shares are the second derivative to the accelerating shift toward digital shopping. Whether you order from our own Amazon (AMZN), Nike (NKE), Wal-Mart (WMT), William Sonoma (WSM) or another retailer, odds are UPS will be one of the delivery solutions.

As we enter 4Q 2107 this week, we’re seeing rather upbeat forecasts for the soon to be upon us holiday shopping season. We’d note that most of these forecasts focus on the period between November and December/January, more commonly known as the Christmas shopping and return season that culminates in post-holiday sales that have retailers looking to make room for the eventual spring shopping season. With Halloween sales expected to reach $9.1 billion this year up 8.3% year over year per the National Retail Federation, we suspect there will be plenty of costumes, candy, and other items for this “holiday” that are purchased online.

Now let’s review the 2017 holiday shopping forecasts that have been published thus far:

Deloitte: Deloitte expects retail holiday sales to rise as much as 4.5% between November and January of this year, vs. last year’s rise of 3.6%, to top $1 trillion. In line with our thinking, Deloitte sees e-commerce sales accelerating this year, growing 18%-21% this year compared to 14.3% last year, to account for 11% of 2017 retail holiday sales.

eMarketer is forecasting total 2017 holiday season spending of $923.15 billion, representing 18.4% of U.S. retail sales for the year, 0.1% decline from last year. Parsing the data from a different angle, that amounts to nearly 20% of all 2017 retail sales. Digging into this forecast, we find eMarketer is calling for US retail e-commerce sales to jump 16.6% during the 2017 holiday season, driven by increases in mobile commerce and the intensifying online battle between large retailers and digital marketplaces. By comparison, the firm sees total retail sales growing at a moderate 3.1%, as retailers continue to experience heavy discounting during the core holiday shopping months of November and December.

As we saw above, a differing perspective can lead to greater insight. In this case, eMarketer’s data puts e-commerce’s share of this year’s holiday spending at 11.5% with the two months of November and December accounting for nearly 24% of full-year e-commerce sales.

AlixPartners: Global business-advisory firm, AlixPartners, forecasts 2017 US retail sales during the November-through-January period to grow 3.5%-4.4% vs. 2016 holiday-season sales. Interestingly enough, the firm arrives at its forecast using some mathematical interpolation – over the past seven years, year-to-date sales through the back-to-school season have accounted for 66.1% to 66.4% of retail sales annually, with holiday sales accounting for 16.9% to 17.0%.

NetElixir: Based on nine years of aggregate data from mid-sized and large online retailers, NetElixir forecasts this year’s holiday e-commerce sales will see a 10% year-over-year growth rate. NetElixir also predicts Amazon’s share of holiday e-commerce sales will reach 34%, up from the 30% last year.

These are just some of the holiday shopping forecasts that we expect to get, including the barometer that most tend to focus on – the 2017 holiday shopping forecast from the National Retail Federation. What all of the above forecasts have in common is the acceleration of e-commerce sales and the pronounced impact that will have in the November-December/January period.

In looking at revenue forecasts for UPS’s December quarter, current consensus expectations call for a 5.8% year over year increase vs. $16.9 billion in the September quarter. We suspect this forecast could be conservative, and the same holds true for EPS expectations, which likely means there is upside to be had vs. the $6.01 per share in consensus expectations for 2017. Over the 2014-2016 period, UPS shares peaked during the holiday shopping season between 19.3-23.5x earnings, or an average P/E ratio of 21.3x. Applying that average multiple to potential 2017 EPS between $6.01-$6.15 derives a price target between $127-$131.

As consumers continue to shift disposable spending dollars to online and mobile platforms, we continue to see Amazon, as well as Alphabet (GOOGL), benefiting as consumers embrace this shift and Cash-Strapped Consumers look to stretch the spending dollars they do have this upcoming holiday shopping season.

  • We are boosting our price target on United Parcel Service (UPS) shares to $130 from $122, an additional 7.6% upside from current levels.
  • Our price target on Amazon (AMZN) shares remains $1,150.
  • Our price target on Alphabet (GOOGL) shares remains $1,050
Facebook’s Content is King effort Watch goes live… will you watch it? 

Facebook’s Content is King effort Watch goes live… will you watch it? 

 

We’ve seen a number of companies, like Netflix (NFLX) and Amazon (AMZN) look to position themselves within our Content is King investing theme. It’s a smart strategy as that proprietary content is a competitive moat that helps reduce customer churn. With Watch, Facebook (FB) is looking to push into streaming video and vie with Alphabet’s (GOOGL) YouTube as a home for longer-form video. And Facebook is hoping to grab a bigger chunk of money from advertisers’ TV budgets, by steering users toward content with more 15-second ad-break opportunities.

It’s worth noting that in addition to smartphones and desktops, Watch is available on several connected-TV platforms: Apple TV, Amazon Fire TV, Android TV and Samsung Smart TV. We like the multi-platform approach, especially since Apple TV has yet to get Amazon’s Prime Video… perhaps we’ll hear more on that on Sept. 12 at Apple’s next big event?

Starting Thursday, Facebook’s Watch feature — essentially a programming guide to episodic shows hosted on the social platform — will become broadly available to users in the U.S., after a three-week limited beta run.

The Watch guide is stocked with several hundred shows, a mélange of scripted, reality, documentary and sports content of varying lengths from both traditional media companies and individual digital creators. (Here’s a select list of shows currently in Watch or coming soon.) The new Watch tab isn’t the only way to access the series: They’re also available through Facebook’s new “Show Pages,” which provide features specifically for episodic video content.

 

Source: Facebook Launches Watch Feature, Shows in U.S.: Will Viewers Tune In? | Variety

YouTube’s  ‘breaking news’ addition further complicates things for broadcast TV

 

Whether it’s on the go, at work or at home, streaming content continues to account for a growing portion of consumer content consumption. It’s, therefore, no surprise that Apple (AAPL), Facebook (FB) and others are looking to join Netflix (NFLX) and Amazon (AMZN) in delivering proprietary content. On the flip side, Disney (DIS) is angling to bring its content directly to consumers rather than through Netflix or broadcast mechanisms.

We see these moves signaling more competition ahead that will force companies to up the ante. Already Amazon and Facebook are looking to bring live sporting events to consumers, and now Google’s YouTube is planning on adding a streaming news section for users to digest “Breaking News.”  This adds to its growing deployment of YouTube TV and raises more questions as to the speed of the demise of broadcasted content. As we see it, the intersection of our Connected Society and Content is King investing themes are poised to deliver more creative destruction that will radically alter the existing playing field much the way the internet skewered the newspaper industry.

YouTube has started rolling out a “Breaking News” section in people’s feeds today across platforms as Alphabet continues to tailor custom content playlists to users logged into Google Accounts, Android Police reports.For most, YouTube is a place to hop from one video to the next and descend down rabbit holes, but browsing anything like a feed has become less straightforward than other platforms, which makes the breaking news section an interesting addition.

As the video sharing site has grown older, the content has grown more produced with YouTube personalities mounting “celebrity” careers, while commentary-heavy videos grow in popularity over the raw video that is more common on Facebook and Twitter.For YouTube’s part this has grown to be a very valuable distinction.

While Facebook’s has seen its video views increase heavily by way of quick-and-dirty videos, YouTube seems to be somewhere where people invest major time browsing, even if there seems to be just as much noise. In June, YouTube CEO Susan Wojcicki announced that the site had 1.5 billion watching an hour of video each on mobile alone.

Source: YouTube starts delivering ‘breaking news’ on its homepage across platforms – TechCrunch

Alphabet Continues to Ride the Connected Society Tailwind

Alphabet Continues to Ride the Connected Society Tailwind

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

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

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

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

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

 

Let’s Look Beneath the Headlines of GOOGL Earnings

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

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

 

Now for what has the shares trading off today

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

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

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

 

 

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

This morning we received the May Retail Sales Report, which missed headline expectations (-0.3% month over month vs. the +0.1% consensus) as well as adjusted figures that exclude autos sales for the month (-0.3% month over month vs. +0.2% consensus). Despite the usual holiday promotional activity, retail sales in May were the weakest in 16 months due in part to lower gasoline prices, which had their biggest drop in over a year. In our view, the report confirms the challenging environment for brick & mortar retailers, despite those lower gas prices, while also affirms our decision not to participate in the space with the Tematica Select List as there were some bright spots below that headline miss.

Almost across the board, all retail categories were either essentially flat or down in May compared to April. The exception? Nonstore retail sales, clothing, and furniture — and nonstore obviously mostly comprised of online retailers since the Sears catalog isn’t in the mailbox too often these days. Comparing May 2017 retail sales to year-ago levels offers a different picture – nearly all categories were up with a couple of exceptions, the most notable being department stores. Again, more confirmation to the “why” behind recent news from mainstays of U.S. mall retailers like Macy’s (M), Michael Kors (KORS), Gymboree Corp. (GYMB) and Sears (SHLD).

Some interesting callouts from the report include that year over year, nonstore retail sales rose 10.2% percent, which brings the trailing 3-month year over year comparison for the category to 11.4%. This data simply confirms the continued shift toward digital commerce that is part of our Connected Society investing theme and is a big positive for our positions in Amazon (AMZN), Alphabet (GOOGL) and United Parcel Service (UPS).

We only see this shift to digital accelerating even more as we head into Back to School shopping season in the coming weeks and before too long the year-end holiday shopping season. While it is way early for a guesstimate on year-end holiday spending, eMarketer has published its view on Back to School spending this year and calls for it to grow 4 percent year over year to $857.2 billion. If that forecast holds, it will mean Back to School spending will account for roughly 17 percent of eMarketer’s 2017 retail sales forecast for all of 2017.

Not ones to be satiated with just the headlines, digging into the report we find more confirmation for our Connected Society investing theme – eMarketer sees e-commerce related Back to School shopping growing far faster, increasing 14.8% to $74.03 billion in 2017. As we like to say, perspective and context are essential, and in this case, should that e-commerce forecast hold it would mean Back to School e-commerce sales would account for 8.6% of total retail sales (online and offline) for the period, up from 7.8% last year.

 

The Connected Society Won’t Be the Only Theme In Play for Back to School Shopping

Given the last several monthly retail sales reports, as well as the increasing debt load carried by consumers, we strongly suspect our Cash-strapped Consumer theme will also be at play this Back to School shopping season, just like it was last year. In its 2016 findings, the National Retail Federation found that “48% of surveyed parents said they were influenced by coupons, up five percentage points from the prior year, while others said they planned to take advantage of in-store promotions and advertising inserts, and 53% said they would head to discount stores to finish prepping for the new school year.”

With consumer credit card debt topping $1 trillion, consumers are likely to once again use coupons, shop sales and hunt for deals, and that bodes very well for the shift to digital shopping. With Amazon increasingly becoming the go-to destination for accessories, books and video, computers and electronics, office equipment, sporting goods and increasingly apparel, we see it continuing to gain wallet share over the coming months.

 

Food with Integrity Theme Seen in Retail Sales Report As Well

Getting back to the May Retail Sales report, another positive was the 2.2% year on year increase in grocery stores compared to data published by the National Restaurant Association that paints a rather difficult environment for restaurant companies. The latest BlackBox snapshot report, which is based on weekly sales data from over 27,000 restaurant units, and 155 brands) found May was another disappointing month for chain restaurants across the board. Per the report, May same-store sales were down -1.1% and traffic dropped by 3.0% in May. With that in mind, we’d mention that last night Cheesecake Factory (CAKE) lowered its Q2 same restaurant comp guidance to down approximately -1%. This is a reduction from prior guidance of between 1% and 2%.

Stepping back and putting these datasets together, we continue to feel very good about our position in Food with Integrity company Amplify Snacks (BETR), as well as spice maker McCormicks & Co (MKS) as more people are eating at home, shopping either at grocery stores or online via Amazon Fresh and other grocery services. Paired with the shifting consumer preference for “better for you” snacks and food paves the way for Amplify as it broadens its product offering and expands its reach past the United States. As we shared in yesterday’s weekly update, United Natural Foods (UNFI) should also be enjoying this wave, but the company recently lowered its revenue guidance, so we’re putting UNFI under the microscope as we speak and we could very well be shifting our capital soon.