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AT&T and Time Warner launch WatchTV, with new unlimited data plans

AT&T and Time Warner launch WatchTV, with new unlimited data plans

The dust has barely settled on the legal ruling that is paving the way for AT&T (T) to combine with Time Warner (TWX), and we are alread hearing of new products and services to stem from this combination. No surprise as we are seeing a blurring between mobile networks and devices, social media and content companies as Apple (AAPL), Facebook (FB), Google (GOOGL) and now AT&T join the hunt for original content alongside Netflix (NFLX), Amazon (AMZN), and Hulu, which soon may be controlled by Disney if it successfully fends of Comcast to win 21st Century Fox.

While we as consumers have become used to having the content I want, when I want it with Tivo and then the content I want, when I want it on the device I want it on with streaming services, it looks now like it will be “the content I want, when I want it, on the device I want on the platform I choose.” All part of the overlapping to be had with our Connected Society and Content is King investing themes that we are reformulating into Digital Lifestyle – more on that soon.

In short, a content arms race is in the offing, and it will likely ripple through broadcast TV as well as advertising. Think of it as a sequel to what we saw with newspaper, magazine and book publishing as new business models for streaming content come to market… the looming question in my mind is how much will today’s consumer have to spend on all of these offerings before it becomes too pricey?

And what about Sprint (S) and T-Mobile USA (TMUS)…

 

Taking advantage of the recent approval of its merger with Time Warner, AT&T on Thursday announced WatchTV, a new live TV service premiering next week — and initially tied to two new unlimited wireless data plans.

WatchTV incorporates over 30 channels, among them several under the wing of Time Warner such as CNN, Cartoon Network, TBS, and Turner Classic Movies. Sometime after launch AT&T will grow the lineup to include Comedy Central, Nicktoons, and several other channels.

People will be able to watch on “virtually every current smartphone, tablet, or Web browser,” as well as “certain streaming devices.” The company didn’t immediately specify compatible Apple platforms, but these will presumably include at least the iPhone and iPad, given their popularity and AT&T’s long-standing relationship with Apple.

The first data plan is “AT&T Unlimited &More”, which will also include $15 in monthly credit towards DirecTV Now. People who pay extra for “&More Premium” will get higher-quality video, 15 gigabytes of tethered data, and the option to add one of several “premium” services at no charge — initial examples include TV channels like HBO or Showtime, and music platforms like Pandora Premium or Amazon Music Unlimited.

&More Premium customers can also choose to apply their $15 credit towards DirecTV or U-verse TV, instead of just DirecTV Now.

WatchTV will at some point be available as a $15-per-month standalone service, but no timeline is available.

Source: AT&T uses Time Warner merger to launch WatchTV, paired with new unlimited data plans

All those streaming services can add up to serious $$

All those streaming services can add up to serious $$

We continue to hear more and more about chord cutting as consumers increasingly to over the top and streaming vidoe services and they shift how, where and when they consume that content. Given the Content is King perspective that we have, it comes as little surprise to see that consumers are utilizing multiple platforms because they want the content they want – plain and simple.

While it’s one thing to have one or two streaming services, as companies like Apple and Disney/ESPN follow Netflix, Amazon, Hulu and others  the content game,  it means consumers could very well see their montly content bill soon rival the monthly cable bill they were looking to avoid. If we game it out, it means either consumers will swallow and pay those bills or as we have seen with in other industries market share will consolidate around less than a handful of providors. In many ways this will be the same evolution the internet went through over the last decade plus, the only difference is it will be unfolding not on the PC but across all of our other connected devices.

No matter what type of media consumer you are, there’s a difference between paying $13.99 per month for Netflix and the thousands of dollars you will be paying per year when you add up all the streaming services you will probably want to subscribe to. And that doesn’t even include the $40 to $300+ per month you will have to spend on broadband access. Let’s have a look at the various ways you might spend your streaming media dollars.

Movies, TV, and Video Streaming Services … Oh, My!

The rise of video streaming services has given us a world of alternatives to traditional cable and satellite video providers. Whether you’re a cord-cutter (ditching cable in favor of streaming services), a cord never (someone who’s never paid a cable provider for monthly services), or a cord plus (someone who pays for cable plus services like Netflix or Hulu), you’re likely paying for at least some of these services:

  • Netflix – $13.99/month ($10.99/month without 4K)
  • Hulu – $11.99/month ($9.99/month with ads)
  • Amazon Prime Video – $13/month (includes free shipping on Amazon purchases)
  • CBS All-Access – $9.99/month ($5.99/month with ads)
  • HBO Now – $14.99/month
  • Showtime Anytime – $10.99/month
  • Starz Play – $8.99/month
  • YouTube Premium – $11.99/month

What started out as an inexpensive way to replace trips to Blockbuster (or to keep you from buying DVDs) has turned into a battleground for your eyes and your wallet. And if you’ve got TV FOMO? Forget about it. Almost every service offers at least some awesome original content. We are lucky to be living in the Platinum Age of video storytelling.

I paid $99 for the first year of CBS All-Access, just to watch Star Trek: Discovery. Is that a smart financial decision? No! Is it worth it? For me it is, because I am a die-hard Star Trek fan and Discovery is awesome!

What further complicates the issue is the ever-changing landscape of rights ownership. Want to binge Parks and Recreation? Better sign up for Netflix. Oh, it’s on Hulu now? Better pay for that, too. Sure, you could buy the complete series on DVD for less than $50, but are you really going to get up from the couch and walk over to the DVD player 21 times to swap out the discs?

Source: Streaming Sticker Shock – Shelly Palmer

Disney continues to execute as it preps its streaming services

Disney continues to execute as it preps its streaming services

 

After Tuesday’s market close, Content is King investment theme company Walt Disney (DIS) reported stronger than expected March quarter results with EPS besting expectations by $0.14 per share. For the quarter, Disney reported EPS of $1.84 vs the consensus forecast of $1.70 and the $1.50 delivered in the year-ago quarter, which means year over year EPS improved 23%. While better than expected revenue of $14.5 billion for the quarter, up 9% year over year and ahead of the expected $14.1 billion for the quarter, aided the EPS beat so too did the 5% decline in the outstanding share count and the lower tax rate (20.7% vs. 32.3%) in the year-ago quarter.

That revenue and buyback combination offset overall operating profit margin declines that reflected softer margins at the Media Networks (42% of sales, 49% of operating profit) and Consumer Products & Interactive Media (7% of sales, 8% of operating profit) despite solid margin improvement at both Parks & Resorts (34% of sales, 23% of operating profit) and Studio Entertainment (17% of sales, 20% of operating profit).

Sifting through all of the segment results and assessing the below the operating line influences, we find that year over year Disney’s operating profit rose 6% with the business spitting out free cash flow of $3.5 billion, up nearly 50% year over year.

 

More high profile movies are on the way…

It’s pretty much business as usual for Disney, and during the earnings conference call CEO Bob Iger shared an upbeat outlook across the Studio Entertainment and the Parks and Resorts businesses. More specifically for the Studio Entertainment business, on the heels of the newest Avengers film that is breaking box office records, Solo: A Star Wars Story, is generating a lot of interest and strong buzz ahead of its Memorial Day weekend opening. Disney will follow that with a dozen high profile movies over the next 18 months, including Incredibles 2, Ant-Man and the Wasp, Ralph Breaks the Internet, Mary Poppins Returns, Captain Marvel, Dumbo, Avengers 4, Aladdin, Toy Story 4, The Lion King, Frozen 2 and Star Wars Episode IX.

 

…that will drive Disney’s other businesses

With Disney merging its Parks & Resorts business with its Consumer Products business, the new combined entity stands to benefit from the coming onslaught in content from Studio Entertainment across its licensing business as well as new attractions at the Parks. Those new attractions include the Toy Story Land that’s about to open in Florida next month, the one that just opened in Shanghai, updated cruise ships, Star Wars: Galaxy’s Edge will open in both Disneyland and Disney World by the end of calendar 2019 plus multiple hotels around the world and new lands in the Paris and Tokyo parks. I see that as more reasons for people to return to the Disney Parks in the coming years.

 

ESPN Plus has launched

Turning to ESPN, the company recently launched its ESPN Plus Service, a streaming sports service, and while it was mum on details given the brief time it’s been in the marketplace, management said it was encouraged by initial results. The team also noted that it recently inked a deal to add UFC content to the Plus service and that it will continue to both invest and license sports content for both live and non-live sports.

 

And about that pending transaction with FOX

In terms of the pending transaction with 21st Century Fox (FOXA), Disney shared that it is still deep in the process, including on the regulatory front, and it could not add more at this time. Even so, Iger went on to share some high-level synergies to be had, particularly from a content side when describing ESPN Plus, Disney’s own direct to consumer streaming service that will launch in late 2019 as well as Hulu of which it will own some 60%. As part of those comments, Iger also answered a lingering question over that Disney branded streaming service – that it will be anchored by Disney, Marvel, Pixar and Star Wars content.

In recent days, Comcast (CMCSA) appears to have thrown its hat back into the ring for the Fox business. I’ll be watching the developments, and what it means for a Disney-Fox combination, which in my view would serve to improve Disney’s content and character library, serving to quickly build a formidable set of direct to consumer streaming services. Next to this is we are waiting to see if the U.S. government approves AT&T’s (T) acquisition of Time Warner (TWX).

Viewing these pending transactions together, we continue to see a transformation when it comes to content creation as well as transmission. I see it as a coming together of our Connected Society investing theme with Content is King to form a new theme in and around our growing digital lifestyle. More on that as I flesh that thought out further in the coming weeks.

 

Bottom line – Disney is doing what it does

To sum it up, Disney is doing what it does – generating tentpole franchise content at the box office and then using that same content to increasingly fueling its consumer products and parks business. As Disney continues to do this, in the coming quarter Disney will look to expand its streaming services, and if successful those subscription businesses are successful, it will add greater visibility and predictability to the company’s revenue and earnings stream as well as cash generation that will be used to buyback shares and re-invest in the company’s businesses. Should that come to pass, Disney will be tapping into our Connected Society investing theme in a way similar to Netflix (NFLX) and I suspect investors will look to re-think valuation multiples for the shares vs. the current multiple of 14.5x 2018 earnings that are poised to grow 21% year over year.

  • Our long-term price target on DIS shares remains $120.

 

 

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

 

Our Latest Thoughts on Trump Tariffs

The stock market roller coaster of the last few weeks is clearly continuing. This week we have President Trump’s potential steel and aluminum tariffs take center stage, shifting the attention away from Fed Chief Jerome Powell last week. When I shared with you my view the market would trade data point to data point until the end of the Fed’s Mar. 20-21 monetary policy meeting, I certainly didn’t expect let alone anticipate these tariffs and their escalating conversation to be a part of it. In a post earlier this week, I shared my view that Trump is once again utilizing the negotiating strategy he laid out in his book, Art of the Deal. In another one today, I gamed out what is likely to happen should Trump go forward with the tariffs.

Last night’s resignation of Trump economic advisor Gary Cohn has certainly fanned the flames of uncertainty over the tariffs, with more people thinking that Trump is “serious.” In an effort to counterbalance that resignation, this morning Commerce Secretary Wilbur Ross shared that Trump “has indicated a degree of flexibility on tariffs for Canada and Mexico.” That Cohn-related walk-back by Secretary Ross, combined with comments made yesterday by Treasury Secretary Steven Mnuchin that indicated that “once a new NAFTA deal is reached, the trading partners wouldn’t be subject to the tariffs” confirms my view that Trump remains on the Art of the Deal negotiation path.

In my post earlier this morning about the tariffs, I shared that we will likely see choppy waters as this issue comes to a resolution and leads up to the Fed’s next monetary policy meeting conclusion on March 21. Expect volatility to remain in place and the coming economic data will either amplify or quell its magnitude. Barring any breaking news, I’ll be on The Intelligence Report with Trish Regan on FOX Business to discuss all of this at 2 PM ET today.

While many fret over the market swings, my perspective is that the domestic economy remains on firm footing and barring a trade war volatility will allow us to pick up thematically well-positioned companies at better prices. A great example of this was had earlier this week with the February heavy truck orders that served to confirm my thesis behind Paccar (PCAR) shares.

When Costco Wholesale (COST) reports its quarterly results after the market close, we should see similar confirmation in the form of not only wallet share gains via its top line results, but also in rising membership fees as more consumers look to stretch the disposable income they do have, a key component of our Cash-Strapped Consumers investment theme.

To set the stage for Costco’s report tonight, consensus expectations for the quarter sit at EPS of $1.46 on revenue of $32.7 billion, up from $1.17 and $29.8 billion in the year-ago quarter. As a reminder, one of the key differentiators for Costco is the high margin membership fees that are poised to grow as the company continues to open new warehouses. This means, at least for me, that roadmap, will be one of the areas of focus on the company’s post-earnings conference call. I’ll also be listening to see the impact of tax reform on the company’s outlook for 2018.

  • Our price target on Paccar (PCAR) shares remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Getting back to the Tematica Investing Select List

In last week’s issue, I began sharing some much-needed updates across the Select List, and I’m back at it again this week with a few more. Over the next few weeks, I’ll look to round out the list before we break at the end of March and get ready to gear up for 1Q 2108 earnings season.

Yes… I know… before too long it will once again be time for that zaniness.

All the more important to share these updates with you so we set the table for the earnings meal to be had.

 

Amazon (AMZN),  Connected Society

Simply put, Amazon shares have been a champ so far in 2018 rising more than 30%, which brings the return on the Select List to more than 100% since being added back in 2016. I’ve said these shares are ones to own, not trade given the accelerating shift to digital commerce, and growing adoption of the high margin, secret sauce that is Amazon Web Services as more businesses turn to the cloud. As filled with creative destruction as those two businesses are, it looks like Amazon is poised to offer further disruption in the healthcare and financial services business given conversations with JPMorgan (JPM), Berkshire Hathaway (BRK.A), Capital One (COF) and others.

I’ve raised our price target several times on AMZN shares, and it increasingly looks like that will have to happen again and then some depending on how soon these new layers of disruption materialize.

  • Our price target on Amazon (AMZN) shares remains $1,750.

 

Starbucks (SBUX), Guilty Pleasure

Year to date, Starbucks shares are essentially unchanged compared to where they were trading as we exited 2017. And the same is true if we look at the shares over the last year – they are up modestly. What we are dealing with here is a company that is once again in transition as it looks to invigorate its domestic business while growing its presence in still underserved markets outside the US like China and Italy. One of the central strategies in both areas is to leverage its high-end Reserve Roastery concept, which keeps the company very much in tune with our Guilty Pleasure investing theme.

Historically speaking, Starbucks has been a company that has been able to successfully pivot its business when it has stumbled, and in our view, that merits some patience with the shares. Helping fuel that patience is the knowledge that Starbucks intends to return $15 billion to shareholders over the next three years in the form of dividends and buybacks.

  • Our price target on Starbucks (SBUX) shares remains $68

 

Disney (DIS), Content is King

Disney shares have traded off some 3% thus far in 2018, which is not unsurprising given we are in the seasonally weakest part of the year for the company. That said, the latest Marvel film, The Black Panther, is crushing it at the box office and ups the ante for the next Avengers film that will hit theaters in a few months. Disney continues to leverage these and other characters as it revamps its theme parks and hotels, which should drive attendance despite yet another round of price increases.

The big “wait and see” for Disney over the coming months will be its move into its own streaming services for both ESPN and eventually a Disney content-centric service. While I see this as Disney making the right moves to address the chord cutting headwind that is part of our Connected Society investing theme, to paraphrase the great film Bull Durham, just because Disney builds it doesn’t mean people will stream it. In a positive move, Disney installed James Pitaro as the new president of ESPN. Mr. Pitaro’s background as chairman of Disney Consumer Products and Interactive Media, as well as the head of Yahoo! Media, sends investors the signal that getting the streaming services in place will be a top priority going forward for ESPN.

The next catalyst to be had for Disney will be spring break and then the summer movie season. Between now and then, I expect Disney will continue to put its massive buyback program to work.

  • Our price target on Disney (DIS) shares remains $125

 

United Parcel Service, Connected Society

Our UPS shares were hard hit earlier in the year given renewed concerns that Amazon would expand its own logistics offering. At the time, my view was this was an overblown concern, and it still is. This week, we saw Stifel Nicolaus warm up to the shares, upping them to a Buy rating with a $121 price target given what it sees as a “strong underlying package and freight businesses.”

Each month in the Retail Sales report we see the share gains had at non-store retailers, and we know companies ranging from Costco and Walmart (WMT) to Nike (NKE) and many others are embracing the Direct to Consumer (D2C) business model. All of this bodes well for UPS shares over the coming year.

The one potential hiccup to watch will be negotiations with the Teamsters Union this summer. If that brings the shares near or below our Select List entry point, I’ll look to scale into this position ahead of the seasonally strong second half of the year.

  • Our price target on United Parcel Service (UPS) shares remains $130.

 

 

Disney’s The Black Panther gets 4 of 4 paws

Disney’s The Black Panther gets 4 of 4 paws

While we tend to focus on global-macro and thematic investing here at Tematica, we are people and that means that from time to time we too like to have some fun and share some of the things we find enjoyable. It doesn’t hurt that in some instances the little pleasures fit with our investment themes or spring from a company on the Tematica Investing Select List. So from time to time, we’ll let our hair down so to speak and share some of those things that we’re doing, spending on, seeing, and more importantly enjoying.

As a long-time self-confessed comic book nerd, I plunked down my money and eagerly saw The Black Panther, the latest in a series of box office crushing films from Disney (DIS) owned Marvel Studios. The storyline, the conclusion of which promises to alter the course of the Marvel Cinematic Universe as well as set up Marvel’s Avengers: Infinity War, was enjoyable even though to most comic book nerds it is somewhat predictable. That said, much like Iron Man, Captain American: The First Avenger and even Ant-Manthere is much back story groundwork to be covered, especially in this newer aspect of Marvel Cinematic Universe. To say Marvel has become adept at layering the backstory into the story telling process would be an understatement, but much credit also has to go to director Ryan Coogler who filmed a thoroughly enjoyable and digestibly dense movie, that

Are the characters multi-faceted and more than dimensional? Yes, and I credit Marvel’s history of story-telling, which has improved much over the 10-years it has been delivering films based on its characters. The Black Pantheralso used humor well, far better than, in my opinion, too jokey Thor: Ragnarok.

Did I like how King T’Challa’s honor guard was, much like the comics, staffed by more than capable warriors, all of which were women? Loved it and not because it allowed Marvel to check several diversity boxes, quelling much of the criticism it has received with its prior slate of movies. Did the check boxing seem forced? Not at all, rather it fit perfectly with the storyline and history of the Black Panther – all one needs to do is read the source material.

Does King T’Challa’s sister Shuri look to give Marvel’s Tony Stark a run for his money in the techno-genius department? Based on the various technologies created by Shuri that are on display in the movie, it sure does and there’s the added benefit that when needed Shuri kicks butt AND keeps the banter going. To Robert Downey Jr.’s Tony Stark, all I can say is, watch out! The portrayal of Shuri by Letitia Wright, Nakia by Lupita Nyong’o and Okoye by Danai Gurira shows that Marvel can deliver well rounded female characters that can be funny, smart and strong. I can’t wait for Marvel’s Captain Marvel.

The bottom line is whether you’re a fan of super hero films or not, it’s a well-crafted story that expands as well as enhances the Marvel tapestry, and the post-credit scenes advance the inter connected storyline that Marvel has carefully put in place over the last 10 years. It’s great fun, and I recommend seeing it.

I give The Black Panthergets 4 or of 4 paws and you can watch the trailer here.

Are there positive Content is King implications for Disney to be had with The Black Panther above and beyond the box office? In my view, it’s a clear cut “yes” and I’ll be sharing those thoughts with subscribers to Tematica Investing in the coming week.

  • Our long-term price target on the shares for Content is King company Disney (DIS) remains $125

 

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

 

 

It’s Wednesday, February 7, and the stock market is coming off one of its wild rides it has seen in the last few days. I shared my thoughts on the what’s and why’s behind that yesterday with subscribers as well as with Charles Payne, the host of Making Money with Charles Payne on Fox Business – if you missed that, you can watch it here.

As investors digest the realization the Fed could boost interest rates more than it has telegraphed – something very different than we’ve experienced in the last several years – the domestic stock market appears to be finding its footing as gains over the last few days are being recouped. Lending a helping hand is the corporate bond market, which, in contrast to the turbulent moves of late in the domestic stock market, signals that credit investors remain comfortable with corporate credit fundamentals, the outlook for earnings and the ability for companies to absorb higher interest rates.

My perspective is this expectation reset for domestic stocks follows a rapid ascent over the last few months, and it’s removed some of the froth from the market as valuations levels have drifted back to earth from the rare air they recently inhabited.

 

Among Opportunity This New Market Dynamic Brings, There Have Been Casualties

While this offers some new opportunities for both new positions on the Tematica Investing Select List as well as the opportunity to scale into some positions at better prices once the sharp swings in stocks have abated some, it also means there have been some casualties.

We were stopped out of our shares in Cashless Consumption investment theme company, USA Technologies (USAT) when our $7.50 stop loss was triggered yesterday. While the shares snapped back along with the market rally yesterday, we were none the less stopped out, with the overall position returning more than 65% since we added them to the Select List last April. For those keeping track, that compares to the 15.3% return in the S&P 500 at the same time so, yeah, we’re not exactly broken up over things. We will put USAT shares on the Tematica Contender List and look to revisit them after the company reports earnings tomorrow (Thursday, Feb. 8).

That’s the second Select List position to have been stopped out in the last several days. The other was AXT Inc. (AXTI) last week, and as a reminder that position returned almost 27% vs. a 15% move in the S&P 500. Again, not too shabby!

The last week has brought a meaningful dip in shares of Costco Wholesale (COST). On recent episodes of our Cocktail Investing Podcast, Tematica Chief Macro Strategist Lenore Hawkins and I have discussed the lack of pronounced wage gains for nonsupervisory workers (82% of the US workforce) paired with rising credit card and other debt. That combination likely means we haven’t seen the last of the Cash-Strapped Consumer investment theme — of the key thematic tailwinds we see behind Costco’s business. While COST shares are still up more than 15% since being added to the Select List, we see the recent 5% drop in the shares as an opportunity for those who remained on the sidelines before the company reports its quarterly earnings in early March.

  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Remaining Patient on AMAT, OLED and AAPL

Two other names on the Tematica Investing Select List have fallen hard of late, in part due to the market’s gyrations, but also over lingering Apple (AAPL) and other smartphone-related concerns. We are referring to Disruptive Technologies investment theme companies Applied Materials (AMAT) and Universal Display (OLED). As we shared last week, it increasingly looks that Apple’s smartphone volumes, especially for the higher priced, higher margin iPhone X won’t be cut as hard as had been rumored. Moreover, current chatter suggests Apple will once again introduce three new iPhone models this year, two of which are slated to utilize organic light emitting diode displays.

Odds are iPhone projections will take time to move from chatter to belief to fact. In the meantime, we are seeing other smartphone vendors adopt organic light emitting diode displays, and as we saw at CES 201 TV adoption is going into full swing this year. That ramping demand also bodes for Applied Materials (AMAT), which is also benefitting from capital spending plans in China and elsewhere as chip manufacturers contend with rising demand across a growing array of connected devices and data centers.

  • Our price target on Apple (AAPL) remains $200
  • Our price target on Universal Display (OLED) remains $225
  • Our price target on Applied Materials (AMAT) remains $70

 

The 5G Network Buildout is Gaining Momentum – Good News for NOK and DY

This past week beleaguered mobile carrier, Sprint (S), threw its hat into the 5G network ring announcing that it will join AT&T (T), Verizon (VZ), and T-Mobile USA (TMUS) in launching a commercial 5G network in 2019. That was news was a solid boost to our Nokia (NOK) shares, which rose 15% last week. The company remains poised to see a pick-up in infrastructure demand as well as IP licensing for 5G technology, and I’ll continue to watch network launch details as well as commentary from Contender List resident Dycom Industries (DY), whose business focuses on the actual construction of such networks.

Several months ago, I shared that we tend to see a pack mentality with the mobile carriers and new technologies – once one makes a move, the others tend to follow rather than risk a customer base that thinks they are behind the curve. In today’s increasingly Connected Society that chews increasingly on data and streaming services, that thought can be a deathblow to a company’s customer count.

  • Our price target on Nokia (NOK) shares remains $8.50
  • I continue to evaluate upgrading Dycom (DY) shares to the Select List, but I am inclined to wait until we pass the winter season given the impact of weather on the company’s construction business.

 

Disney Offers Some Hope for Its ESPN Unit

Last night Disney (DIS) announced its December quarter results while the overall tone was positive, the stand out item to me was the announcement of the new ESPN streaming service being introduced in the next few months that has a price tag of $4.99 a month. For that, ESPN+ customers will get “thousands” of live events, including pro baseball, hockey and soccer, as well as tennis, boxing, golf and college sports not available on ESPN’s traditional TV networks. Alongside the service, Disney will unveil a new, streamlined version of the ESPN app, which is slated to include greater levels of customization.

In my view, all of this lays the groundwork for Disney’s eventual launch of its own Disney streaming content service in 2019, but it also looks to change the conversation around ESPN proper, a business that continues to lose subscribers. Not surprising, given that Comcast (CMCA) continues to report cable TV subscriber defections. One of the key components to watch will be the shake-out of the rights to stream live games from the major professional leagues — the NFL, Major League Baseball, the NBA. Currently, ESPN is on the hook for about $4 billion a year in rights fees to those three leagues alone — not to mention the rights fees committed to college athletics. Those deals, however, include only the rights to broadcast those games on cable networks or on the ESPN app to customers that can prove they have a cable subscription, not cord-cutters. So the question will be how quick will customers jump on board to pay $5 a month for lower-level games, or will they be able to cut deals with the major professional sports leagues to include some of their games as well.

Nevertheless, I continue to see all of these developments as Disney moving its content business in step with our Connected Society investing theme, which should be an additive element to the Content is King investment theme tailwind Disney continues to ride. With that in mind, we are seeing rave reviews for the next Marvel movie – The Black Panther – that will be released on Feb. 16. The company’s more robust 2018 movie slate kicks off in earnest a few months later.

  • We will continue to be patient investors with Disney, and our price target on the shares remains $125

 

 

 

Disney’s buying Fox has a Connected Society appeal

With consumers increasing shifting their content consumption to streaming services, be it online or via mobile, we are seeing a number of moves by companies to position themselves accordingly. AT&T (T) is looking to buy Time Warner (TWX), Alphabet (GOOGL) is expanding the reach of YouTubeTV and Apple (AAPL) is hiring programming talent. Amid all of this, Disney scooped up key content assets of Twenty-first Century Fox (FOXA) this week, a long-time strategy of the House of Mouse, but it also acquired the controlling interest in stream service Hulu.

That extra nugget could radically change and potentially accelerate Disney’s already announced plan to launch its own set of streaming services, one for Disney content and the other for ESPN. We see this as a potential gamechanger that also adds our Connected Society tailwind to the Content is King company that is Disney.

 

The deal puts Fox’s movie studio, 20th Century Fox, under the Disney umbrella, bringing with it the studio’s intellectual property. Having 20th Century Fox’s “X-Men” and “Avatar” under the same roof as Disney’s “The Avengers” and “Star Wars” could have huge ramifications in both the streaming world and the film industry.

Disney announced in August that it will pull its content from Netflix, effectively ending its relationship with the streaming service to start its own in 2019. This means Netflix users will no longer be able to watch content from Lucasfilm, Marvel, Pixar and Disney Animation.The deal between the two media giants means that Disney’s streaming service will include its own deep vault of intellectual property, as well as Fox’s decades of popular franchises, which would most likely get pulled from streaming competitors.

As much as this deal is about the content that Disney would be getting from Fox, it’s also about content competitors like Netflix would not.The deal also means Fox’s stakes in Hulu now belong to Disney, which already has an equal stake along with Comcast. With a majority stake in Hulu, Disney could change the award-winning streaming service’s offerings.

Source: What the Disney-Fox deal means for Marvel, ‘Avatar,’ and streaming – Dec. 14, 2017

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

 

A Content is King primer on the developing world of e-sports

A Content is King primer on the developing world of e-sports

 

 

Amid expanding markets such as digital commerce and streaming video that sit at the top of our Connected Society investing theme —and to some extent, our Content is King one  — other growing markets and their opportunities can be stepped over and missed from time to time. One that I’ve been keeping tabs on from the periphery market is e-sports, but even I tend to sit up and take notice when the market for this form of content consumption is set to grow from $493 million in 2016 to $660 million this year, and more than $1.1 billion in 2019. That’s remarkable growth, fueled by a growing base of global enthusiasts, and one that is seeing Corporate America sit up and take notice as well.

That’s right, as amazing as it might sound, more than 20 years after the first video game tournaments, top e-sports tourneys now draw audiences that rival the biggest traditional sporting events. A decade ago, amateur competitions drew a few thousand fans in person and over the Internet. In October 2013, 32 million people watched the championship of Riot Games’ League of Legends on streaming services such as Twitch and YouTube — that’s more than the number of people who watched the TV series finales for Breaking Bad, 24 and The Sopranos combined; it’s also more than the combined viewership of the 2014 World Series and NBA Finals.

In 2015, Twitch reported more than 100 million viewers watch video game play online each month. According to the Entertainment Software Association, more than 150 million Americans play video games, with 42% of Americans playing regularly. The key takeaway from this litany of statistics is the e-sports market has continued to grow. And it is poised to continue doing so, as casual-to-serious players become tournament viewers.

In the last few months, streaming service Hulu has picked up four new series that are centered around e-sports as part of its move to replicate the success at Netflix (NFLX) and Amazon (AMZN) in their push to create original and proprietary content. Another sign that e-sports are turning into a big business was at rating company Nielsen (NLSN) when it launched a new division focused on providing research on e-sports.

One of the opportunities being assessed by Nielsen lies in measuring the value of e-sports tournament sponsorships. In 2017 there are more than 50 such events, with recent and current e-sports tournament sponsors including Coca-Cola (KO), Nissan, Logitech (LOGI), Red Bull, Geico, Ford (F), American Express (AXP) and a growing list of others.

Tournaments streamed to everyone over Twitch.tv have reported five million concurrent viewers for Dota 2 and 12 million concurrent viewers for League of Legends. And these viewers tend to be the ones consumer product companies want — more than half of e-sports enthusiasts globally are aged between 21 and 35 and skew male. That’s the sound of disposable income you hear — and so do those sponsors.

The ripple effect is even moving past tournaments into movies and other content forms. Video game maker Nintendo (NTDOY) is reportedly near a deal with Illumination Entertainment, a partner of Comcast (CMCSA) to bring its flagship Super Mario Bros. franchise to the big screen. Granted Super Mario is not quite the same as some of the games associated with e-sports, but it is one of the most popular video game franchises of all-time, with the series of games selling over 330 million units worldwide. Over the last few quarters, we’ve seen a film hit screens based on the Assasin’s Creed game that was first released in 2007, and this leads us to think we could see more storylines developed much the way Disney (DIS) and 21st Century Fox (FOXA) are doing with the Marvel characters and Time Warner (TWX) with Batman, Superman, and other DC comics properties.

When I see a market taking shape like this, with these characteristics and all the confirming data points to be had, it means looking at which companies are poised to benefit from this aspect of our Content is King investing theme.

In this case, that means interactive gaming content ones like Electronic Arts (EA), Activision Blizzard (ATVI) and Take-Two Interactive (TTWO) among others. In looking at the industry data, we find a rather confirming set of data given the most recent monthly video game sales data for September published by NPD Group showed robust year-over-year sales, up 39% to $1.21 billion.

Breaking it down, software sales soared 49% due to the continued shift to console and portable platforms and away from PCs, and hardware sales rose 34% vs year ago levels. The top three games of the month were Activision’s Destiny 2, NBA2K18 by Take-Two and Madden NFL 18 by Electronic Arts. That set the stage for third-quarter 2017 earnings for these companies, especially given that in September Activision’s Destiny 2 became the best-selling game of thus far in 2017.

Recently, Electronic Arts shared on its third-quarter 2017 earnings call that among its growth priorities is the expansion of live services, which includes the integration of the company’s e-sports business across more gaming titles. As such, EA sees competitive gaming becoming a greater piece of its portfolio, as it builds on Madden NFL Club Championship, the first e-sports competition to feature a full roster of teams and players from a U.S. professional sports league. Tournaments to represent all 32 NFL teams are already underway.

Meanwhile on its September quarter earnings call Activision Blizzard confirmed its e-sports Overwatch League will begin regular season play on January 10, it has inked sponsorship deals with Hewlett-Packard (HPQ) and Intel (INTC) and the Overwatch community now spans more than 35 million registered players. The league has 12 inaugural teams complete with physical and digital merchandise for sale to fans.

We’ll be watching to see the initial reception as pre-season competition begins next month at the Blizzard Arena Los Angeles and we’ll be sure to crunch the numbers and understand what’s baked into existing expectations for ATVI shares and the others. Those answers will help determine how much additional upside there is to be had near term, following the meteoric rise of ATVI shares this year — up more than 75% year to date vs. 25.7% for the Nasdaq Composite Index and more than 15.0% for the S&P 500.

 

 

 

Remaining patient in the face of more near-term pain for Disney shares

Remaining patient in the face of more near-term pain for Disney shares

In recent weeks, shares of Content is King company Walt Disney (DIS) have drifted lower as the company shared it is pulling its content from Netflix (NFLX) and embarking on its own streaming services for Disney, Marvel and Star Wars content as well as ESPN. This move brings more than a few questions at a time when candidly there is no clear cut catalyst for the shares. Investors don’t like uncertainty and hence the slow drift lower in the shares to the recent $101-$102 level, that is in line with our entry points in the shares, from $110-$111 just over a month ago.

Given new developments that include CEO Bob Iger sharing that Disney’s 2017 EPS would be flat year over year, vs. consensus expectations that were looking for year on year growth near 2.5%, and the impact of Hurricane Irma on its Florida operations, we expect DIS shares could come under additional pressure in the near-term. One strategy would be to exit the shares, another is to recognize that in the next few months Disney will once again be back at the box office as well as opening new attractions at is very profitable parks business. As a reminder, the company recently opened Frozen land and is slated to open Toy Story land in 2018 followed by Star Wars Land in 2019. These new and branded attractions are likely to entice former park visitors as well as attract new ones.

As the water and impact of Irma subside, we will look to use any incremental near-term pain in DIS shares to improve our cost basis, remembering the company had a whopper of a share buyback program in place exiting the June quarter. On that corresponding earnings conference call, Disney signaled it would repurchase between $2.2-$3.2 billion of stock in the current quarter. Odds are that effort will help backstop the shares in the coming days. Our bias is to use any pullback that brings the shares closer to the $90 level to improve the positions cost basis. Recognizing the potential impact of Irma, and remaining questions on its proprietary streaming business, however, we are reducing our price target to $120 from $125.

  • While we expect further near-term disruptions at Disney (DIS) owing to Hurricane Irma, we will remain patient with the shares.
  • We are trimming our price target to $120 from $125.