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This week’s earnings season game plan

This week’s earnings season game plan

 

We have quite the bonanza of corporate earnings for holdings on the Tematica Investing Select List. It all kicks off tomorrow with Corning (GLW) and picks up steam on Wednesday with Facebook (FB). The velocity goes into over drive on Thursday with United Parcel Service (UPS) in the morning followed by Amazon (AMZN), Alphabet/Google (GOOGL) and Apple (AAPL). Generally speaking, we expect solid results to be had as each of these companies issues and discuss their respective December quarter financials and operating performances.

Given the recent melt-up in the market that has been fueled in part by favorable fundamentals and 2018 tax rate adjustments, we expect to hear similar commentary from these Tematica Select List companies over the coming days. The is likely to be one of degree, and by that I mean is the degree of tax-related benefits matching what the Wall Street herd has been formulating over the last few weeks? Clearly, companies that skew their geographic presence to the domestic market should see a greater benefit. The more difficult ones to pin down will be Facebook, Apple, Amazon and Google, which makes these upcoming reports all the more crucial in determining the near-term direction of those stocks.

We are long-term investors that can be opportunistic, provided the underlying investment thesis and thematic tailwinds are still intact. Heading into these reports, the thematic signals that we collect here at Tematica tell me those respective thematic tailwinds continue to blow.

As we await those results, we continue to hear more stories over Apple slashing iPhone X production levels as well as bringing a number of new iPhone models to market in 2018. These reports cite comments from key suppliers, and we’ll begin to hear from some of them tomorrow when Corning reports its quarterly results. We’ll get more clarity following Apple’s unusual tight-lipped commentary on Thursday, and even if production levels are indeed moving lower for the iPhone X we have to remember that Apple’s older models have been delivering for the company in the emerging markets. Moreover, the company could unveil a dividend hike or upsized repurchase program or perhaps even both as it shares the impact to be had from tax reform. As I shared last week, there are other reasons that keep us bullish on Apple over the long-term and our strategy will be to use any post-earnings pullback in the shares to improve our cost basis.

In digesting Apple’s guidance as well as that offered by other suppliers this week and next we’ll be keeping tabs on Universal Display (OLED), which is once again trading lower amid iPhone X production rumors. As I pointed out last week, Apple is but one customer amid the growing number of devices that are adopting organic light emitting diode displays. We remain long-term bullish on that adoption and on OLED shares.

We’ve received and shared a number of data points for the accelerating shift toward digital shopping in 2017 and in particular the 2017 holiday shopping season. We see that setting the stage for favorable December quarter results from United Parcel Service and Amazon later this week. We expect both companies to raise expectations due to a combination of upbeat fundamentals as well as tax reform benefits. With Amazon, some key metrics to watch will be margins at Amazon Web Services (AWS) as well as investment spending at the overall company in the coming quarters. As we have shared previously, Amazon can surprise Wall Street with its investment spending, and while we see this as a positive in the long-term there are those that are less than enamored with the company’s lumpy spending.

In Alphabet/Google’s results, we’ll be looking at the desktop/mobile metrics, but also at advertising for both the core Search business as well as YouTube. Sticking with YouTube, we’ll be looking for an update on YouTube TV as well as its own proprietary content initiatives as it goes head to head with Netflix (NFLX), Amazon, Hulu and Apple as well as traditional broadcast content generators.

In terms of consensus expectations for the December quarter, here’s what we’re looking at for these six holdings:

 

Tuesday, JANUARY 30, 2018

Corning (GLW)

  • Consensus EPS: $0.47
  • Consensus Revenue: $2.65 billion

 

Wednesday, January 31, 2018

Facebook (FB)

  • Consensus EPS: $1.95
  • Consensus Revenue: $12.54 billion

 

Thursday, FEBRUARY 1, 2018

United Parcel Service (UPS)

  • Consensus EPS: $1.66
  • Consensus Revenue: $18.19 billion

 

Alphabet/Google (GOOGL)

  • Consensus EPS: $10.00
  • Consensus Revenue: $31.86 billion

 

Amazon (AMZN)

  • Consensus EPS: $1.84
  • Consensus Revenue: $59.83 billion

 

Apple (AAPL)

  • Consensus EPS: $3.81
  • Consensus Revenue: $86.75 billion

 

 

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.

 

 

Special Alert: Apple added to the Tematica Investing Select List

Special Alert: Apple added to the Tematica Investing Select List

 

KEY POINTS FROM THIS ALERT:

  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.
  • In our view, Apple and its new iPhone models are a 2018 story, and we see the recent string of upwardly revised expectations continuing as Apple tweaks its iPhone production and takes newer models global.
  • We would look to use pullbacks in the AAPL shares to improve our long-term cost basis.

This morning we are adding, some would say finally, Apple (AAPL) to the Tematica Select List. It’s no secret that those of us at Tematica are hardcore users of the company’s products — from MacBooks, iPhones and iPads, to the Apple Watch, Time Machine and various other devices. Despite its deep bench of product, Apple, at least for now, is a smartphone company. Even ahead of the recent launches of its iPhone 8, 8S and iPhone X products, Apple derived the bulk of its revenue and profits from the iPhone.

Apple does have other businesses like Apple TV that bolster its position in our Connected Society investing theme, and the company appears to be branching out into live content similar to Tematica Investing Select List companies Amazon (AMZN) and Facebook (FB). We suspect that like many past products and services, Apple will look to unveil its content offering when it is ready, not when the financial media thinks it will. We see that as an added tailwind on the horizon for AAPL shares, provided it can get the content right. Case in point, we were not won over by Apple’s Carpool Karaoke series; however, per the financial press, Apple appears to have recognized its shortcoming and has gone on a hiring spree to course-correct this effort.

 

For many subscribers, the probable question is “Why now?”

Candidly, we have always kept eyes on Apple’s business given how it touches our Connected Society investing theme as well as its shares. Were we underwhelmed by the company’s September event? Yes, we were, given the staggered nature of the new iPhone launches and the simple fact the company kicked off the event discussing how it was going to revolutionize its Apple Stores vs. talking products. There was also the concern that iPhone sales would pause as shoppers waited for the iPhone X to hit shelves not to mention rumored component shortages.

Over the last few days, orders for the iPhone X commenced and early indications suggest it will be a brisk seller. Almost all Apple store channels are now reporting 5-6 week delivery times for new iPhone orders across all configurations of size and color, which means new online orders will not be fulfilled until early December. The initially low production volumes were due to component constraints for the new 3-D face-scanning sensor and a circuit board for a new camera were to blame and Apple is expected to have this corrected in the coming weeks.

Turning to the iPhone 8, while sales have been tepid ahead of the iPhone X launch in the U.S., this morning a new report from Canalys shows the iPhone 8 has led Apple to break a run of sales decreases that stretches back six quarters. Per the report, Apple should see a 40% annual growth to 11 million iPhone units China during the quarter. As with any new product launch, we see Apple tweaking production between these new iPhone models to better match demand.

In our view, we are likely to see Apple up its iPhone X product and dial back production for the iPhone 8, which is a nice but modest upgrade from the iPhone 7 — a model that continues to sell well. That’s right, it’s not just about the new models – the older ones, which are less expensive, help drive Apple sales in the all-important emerging markets like India, where smartphone penetration is far lower than in the U.S. In the U.S., smartphone penetration passed 80% last year. By comparison, roughly one-third of mobile phone users have a smartphone in India, and that figure is expected to only move higher in the next few years.

As we look back on prior iPhone launches, we find ourselves saying “I’ve seen this movie before” and we have. It usually bodes rather well for Apple and we expect that to be the case once again given the large install base Apple has for the iPhone. Last summer Apple sold its 1 billionth iPhone, but as we know from experience and upgrades, not all phones sold are still in use. According to research from UBS, the number of active devices is around 800 million, roughly 80% larger than when Apple debuted the iPhone 6. Simply put, the larger the number of active users, the larger the number of people upgrading every time Apple unveils a new smartphone, especially as newer versions of iOS tend to make older iPhone painfully slow.

There is also the added benefit of Apple putting would-be iPhone buyers in a box as they look to match either an iPhone upgrade or a new purchase with storage needs. Given the increasing usage of the camera for pictures and video, Apple has upped available storage, but that comes at a cost. We see this as well as the iPhone X helping move Apple’s average iPhone selling prices higher in the coming months.

Apple will report its 3Q 2017 results later this week, and odds are given the timing of the new iPhone model launches the company will get a pass of sorts on that performance. In our view, the guidance will be what investors will be focused on, and they will be listening, as will we, not only on iPhone production commentary, but the timing around these models being launched in other markets. As these models go truly global, it makes the iPhone story and thus Apple’s story a 2018 event. We are not alone in that thinking given that current revenue expectations for 2018 have Apple delivering 17% growth to $266.8 billion vs. 5.5% growth this year. As this occurs, odds are the Wall Street bulls will once again return to AAPL shares, and we want to be there ahead of them.

We recognize Apple can have great quarterly earnings report that leads to AAPL shares popping, but from time to time the company has issued results that caused some degree of investor indigestion. We want to be positioned for the former, but we will use the latter should it happen later this week to improve the cost basis for AAPL shares on the Tematica Investing Select List for the longer-term. In our view, Apple is one of the companies that will expand its offering as our Connected Society continues to expand past smartphones and computers to the home, car and the Internet of Things. Apple is paving the way for proprietary content, adding to its position in the home with its HomePod digital assistant and growing its partnerships in Corporate America.

 

Apple’s story is far from over.

Our price target on Apple shares is $200 or 18x expected current 2018 consensus EPS of $11.16. We’d note that over the last few weeks that 2011 consensus EPS figure has crept up from $10.67, and there is the rather likely possibility we will see that figure move even higher as we enter 2018. Over the last several quarters, Apple has regained its past track record for beating bottom line expectations and given the high profile nature of the iPhone X we would not be shocked to learn Apple has once again sandbagged expectations for the second half of 2017.

Over the last five years, Apple shares have peaked at an average P/E multiple of 16x and bottomed out at 11x. That suggests an upside vs downside tradeoff in the shares between $120-$180, vs. the current share price near $160. As we noted above, we strongly suspect Apple will surprise to the upside in 2018 and could deliver EPS between $12-$13; the current high estimate for Apple EPS in 2018 sits at $13.29. In the coming quarters, provided Apple’s EPS beating track record continues, we see 2018 EPS expectations moving higher, and Wall Street bumping up price targets along the way. If Apple stumbles near-term, we would look to aggressively scoop up the shares between $140-$145.

  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.
Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

We are officially in the thick of earnings season with reports from AXT Inc. (AXTI) last night, and both Nokia (NOK) as well as United Parcel Service (UPS) this morning. Below we have comments on the better than expected results from AXT, share why we are going to be patient with Nokia shares for the long-term and how United Parcel Service confirms out thesis on the shares. We also have some thoughts on the recent share price pressure in Amplify Snacks (BETR), and explain why Amazon’s (AMZN) comments and outlook on its Whole Foods business are what we’ll be watching next for this position.

 

Many positives in AXT’s 3Q 2017 earnings report and outlook

Last night compound semiconductor substrate and Disruptive Technology company AXT (AXTI) reported 3Q 2017 top and bottom line results that handily beat consensus expectations and delivered an in-line view on the current quarter. This popped the shares some 7% in aftermarket trading last night and sees the shares trading up nicely today.

More specifically, AXT delivered EPS of $0.11, $0.02 better than the consensus and up dramatically from $0.07 in the year-ago quarter on revenue that rose 29% compared to 3Q 2017. Higher substrate volumes revealed the operating leverage in the company’s business model and led gross margins to soar to 39.5% in the quarter, up from 30.8% in the prior quarter. Other factors aiding the margin comparisons included raw material prices and vendor consolidation as well as product mix, both of which help margins in the coming quarters.

In terms of its outlook for the current quarter, AXT guided revenue and EPS in the ranges of $26-$27 million and $0.07-$0.09, respectively, which compares with the consensus forecast of $26.6 million in revenue with EPS of $0.08. What’s not obvious in those ranges is expected growth at the midpoint of 22% and 47%, respectively. The current quarter, as well as the next one, tend to reflect the seasonal downtick compared to the third quarter 3Q 2017, which tends to house the RF semiconductor ramp for year-end smartphone sales. Given new smartphone models, continued growth in data traffic that is leading further data center investment, and new solar panel applications the outlook for continued year over year growth at AXT remains more than favorable.

For example, Audi and BMW are using solar panels on certain new models to provide power to the vehicle’s climate control system fan without ruining the battery, even when the vehicle is turned off. In addition, Audi and Alta Devices recently announced their partnership to integrate solar cells into panoramic glass roofs of Audi models to generate solar energy that increases the range of Audi electric vehicles. The first of these car prototypes are expected to by the end of this year, and the solar cells utilize compound semiconductor technology that is built on AXT’s substrates.

In the data center arena, companies such as Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Broadcom (AVGO) and a number of others are driving the adoption of silicon photonics to drive data rates of 100 gigabits per second or better. This adoption bodes well for AXT’s higher margin indium phosphide substrates.

Recognizing the seasonal downturn we will face in the coming months, we will continue to be patient with AXTI shares.

  • Our price target on AXT (AXTI) shares remains $11, which for now keeps the shares a Buy at current levels.
  • With regard to that rating, we’ll be watching the $9.90 level, which offers roughly 10% upside to our price target.

 

Nokia: The market focuses on network infrastructure, but it’s the licensing business that matters.

Early this morning Nokia (NOK) reported 3Q 2017 results of €0.09 per share in earnings, €0.03 ahead of expectations even though overall revenue fell 7% year over year to €5.54 billion, a hair shy of the €5.64 billion consensus forecast. In trading today, Nokia shares are getting hit hard given the guidance that calls for continued declines in its Networks Business. We are not surprised by this guidance as we continue to wait for deployments of 5G technology in 2018-2020. Despite that shortfall, continued focus on cost in the Networks Business, as well as ongoing customer wins bode well for the business as the 5G ramp begins.

What we found as rather confirming was the continued growth in its high margin Nokia Technologies business, which rose to 9% of 3Q 2107 sales and 22% of 3Q 2018 gross profits up from 6% and 15%, respectively, in the year-ago quarter. Despite the overall revenue shortfall for Nokia in 3Q 2017, Nokia Technologies led the company’s consolidated margins higher and drove the EPS upside in the quarter. In other words, our thesis behind owning NOK shares was confirmed in this morning’s earnings report. As 5G and other technologies contained in the company’s intellectual property arsenal matriculate in the coming quarters, we see continued improvement ahead for this business and that bodes well for the company’s overall margin and EPS generation.

One of our key strategies has been to use share price weakness to scale into a position on the Tematica Select List provided the underlying investment thesis remains intact. As we saw in Nokia’s 3Q 2017 earnings report, that is the case. As we look for that opportunity, we’d note that Nokia’s Board of Directors plans to propose a dividend of EUR 0.19 per share for 2017, which if history holds will be paid in the first part of 2018. Given the current share price, that is a hefty dividend yield to be had and adds both a layer of support to the shares and adds to the total return to be had.

  • Our price target on Nokia (NOK) shares remains $8.50

 

Quick thoughts on UPS’s 3Q 2107 results

With United Parcel Service (UPS), the results and outlook were in line what we expected and simply put the company’s outlook simply reinforces our shift to digital commerce predicated thesis on the shares. Case in point, UPS sees:

  • Record holiday delivery of about 750 million packages,
  • Deliveries between Black Friday and New Year’s Eve forecasted to increase 5% from 2016
  • 17 of 21 holiday delivery days before Christmas to exceed 30 million packages each.

This latest forecast echoes what we’ve already heard about this holiday shopping season from the National Retail Federation, E-Marketer, and others.

We’ll dig through the UPS’s earnings call in greater detail, but what we’ve heard thus far along with a price increase slated for December 24th keeps our Buy rating and $130 price target intact. As we do that, we’ll also be looking at Amazon’s forecast for the current quarter and its comments on the holiday shopping season.

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

 

Shares of Amplify Snacks under pressure, but Amazon/Whole Foods will be the guide

Finally, our Amplify Snacks (BETR) shares have been under pressure this past week. On the news front, things have been rather quiet and the shares could be coming under pressure as institutional investors being their tax loss selling. We’ll look for confirmation on our thesis – consumers shifting toward food and snacks that are “healthy for you” in quarterly results out tonight from Amazon (AMZN) as it discusses recent performance and its outlook for recently acquired Whole Foods. As we do this, we’ll also be revisiting the dollar’s recent run-up and what it could mean for Amplify given its growing exposure to markets outside of the U.S.

With the shares approaching oversold levels, we are keeping a close eye on the shares. As we mentioned above with Nokia, we certainly like to improve our cost basis provided our investment thesis remains intact.

No need to catch the falling knife that is Blue Apron, we have Amazon

No need to catch the falling knife that is Blue Apron, we have Amazon

This year we’ve seen several busted initial public offerings, and one of them is Blue Apron (APRN), which came public at near $10 and been essentially cut in half over the last four months. As was joked in the business pages, that is “less than the price of one of its meals.”

Such a sharp drop raises the question, “Could the fall in the stock be overdone?”

That’s a fair question as one of the tools in the investing kit is picking off undervalued stocks. The keyword that makes all of the difference is “undervalued” as it relies on the notion that at a certain point, other investors and the market will recognize the potential value to be had in the underlying business.

Let’s remember the impetus that led to Blue Apron landing on the busted IPO list: Amazon’s (AMZN) intent to acquire Whole Foods and trademarking its own meal kit offering. This made Blue Apron, along with Kroger (KR) and other grocery stores, the latest company to be upended by Amazon. Last week we saw Amazon add eMeals to AmazonFresh. Through the program, eMeals subscribers can now send their shopping list, which is automatically generated for all meals selected each week, to AmazonFresh as well as Walmart (WMT) Grocery and Kroger ClickList. Another thorn in the side of Blue Apron.

There was more news for Blue Apron last week as the company announced a “company-wide realignment” to “focus the company on future growth and achieving profitability…” As part of that realignment, Blue Apron said it would be cutting 6% of its workforce. Let’s remember that this comes less than a handful of months after the company went public!

But it gets worse.

Current consensus expectations have Blue Apron losing $1.56 per share this year, with bottom-line losses narrowing to -$0.73 per share in 2018. Keep in mind the company botched its first quarter as a public company when it posted a second-quarter loss of $0.47 per share vs. the expected $0.30 per share loss. That’s a huge miss out of the gate as a newly public company.

Put that out of the box earnings miss together with its headcount reductions and we have a pretty clear credibility problem with the management team, which is likely to be outclassed and out-muscled by Amazon and other grocery chains. And that raises the question as to what is Blue Apron’s competitive advantage? Recipes? Ingredients? Those can both be replicated by Amazon, especially with Whole Foods, and others as they scale up their natural and organic offerings to ride our Food with Integrity investment theme tailwind.

As we ponder that, let’s not forget that Blue Apron closed its June 2017 quarter with $63.3 million in cash on its balance sheet. That compares to the net loss of $83.8 million during the first half of 2017 and the expected net loss of that is expected to grow in the second half of the year. Simple math tells us, the company is poised to face a cash crunch or do a painful secondary offering to bring in additional cash. We’ve seen this movie before and it never has a happy ending.

The bottom line is APRN shares are cheap, and they are cheap for a reason – they are running headlong into the headwind of our Connected Society and Food with Integrity investment themes. My advice is to move along and not be tempted by the falling knife that is APRN. Better to focus on a well-positioned company that has an enviable or defendable competitive advantage. To us here at Tematica, that is Amazon (AMZN) in spades.

  • Our price target on Amazon (AMZN) shares is $1,150.
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.

 

 

WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

Stocks continued to inch higher over the last several days ahead of today’s next Fed policy meeting. Over the last few days, we’ve seen GDP expectations for the current quarter revised lower from economists, regional Fed banks and even companies like FedEx (FDX), which sees GDP hitting all of 2.2% this year. I continue to see the Fed taking yet another pass on boosting interest rates later today, and given the impact from the recent hurricanes, the team Tematica view is that while next potential interest rate hike could come late this year, it’s more likely going to be in 1Q 2018.

The more closely watched item in the Fed’s comments will be timing for its balance sheet unwinding, and that means parsing the Fed-speak out this afternoon. Much like interest rates, I suspect the Fed will take a pass this month on kicking that initiative off and revisit the strength of the economy at its October/November meeting, but again, more on that once we have parsed the Fed’s words. We’ll have the Tematica take and what it means for the markets as well as the Tematica Investing Select List tomorrow morning.

Keeping the market somewhat in check yesterday was President Trump’s address to the United Nations General Assembly at which he shared he will take a hard line, vowing to “totally destroy” North Korea if it threatened the United States or its allies. Nothing keeps uncertainty alive lately quite like political drama in DC. Such drams also now includes questions over the potential benefits to the domestic economy with corporate tax reform at a time when the federal budget deficit continues to climb. Let’s also remember we are on the cusp of the 2017 election season, and even as President Trump reaches across the aisle, odds are it won’t be an all “cookies and warm milk” as politicians are vying for their own jobs.  For this reason, I see tax reform more likely toward the end of 2017, which happens to be when the debt ceiling conversation will be resumed.

 

Earnings this week, set the stage for coming 3Q 2107 season

Over the next week and a half we will close the books on 3Q 2017 and face quarterly earnings. Before too long the year-end holidays will be upon us. Last night we had a few earnings reports from FedEx, Bed Bath & Beyond (BBBY) and Adobe Systems (ADBE), and today all three stocks are trending lower. Part of the reason for FedEx missing expectations last night was the disruption it faced due to its recent cyber attack. Such attacks are yet another reminder that the cybersecurity aspect of our Safety & Security theme is a form of insurance in our Connected Society. This keeps us long-term bullish on PureFunds ISE Cyber Security ETF (HACK) shares.

Despite a beat at Adobe, the company signaled softer than expected growth for its cloud business. When paired with revenue guidance that was in line with expectations and the stocks sky-high valuation near 40x 2017 earnings per share, it’s not surprising to see ADBE shares trading off today. I point this out because it is another example of good news being ill-received on Wall Street — another reason to think the next few weeks will continue to be volatile.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

 

Another brick & mortar retailer looks to leverage Amazon

While earnings reports from FDX, BBBY and ADBE will factor into our larger thinking, what I found far more interesting was the new partnership announced between thematic investing poster child Amazon (AMZN) and retailer Kohl’s (KSS), which includes Kohl’s offering to accept returns for Amazon customers at 82 stores in Los Angeles and Chicago. This is yet another example of a retail-facing company looking to partner with Amazon, and to me, it speaks to the logistics power that is one of Amazon’s core strengths.

Perhaps the management team at Kohl’s saw what I did in the last week’s August Retail Sales Report –  continued pain at department stores as shoppers continue to shift spending to digital platforms. As much pain as we here at Tematica see for brick & mortar retailers in the upcoming year-end holiday shopping season, we see a similar amount of opportunity for Amazon given its footprint expansion over the last year.

  • Our price target on Amazon (AMZN) shares remains $1,150, which keeps the shares a Buy on the Tematica Investing Select List.

 

 

Results at United Natural Foods offer comfort for Amplify Snacks

One of the positions that has been lagging this market move higher is Food with Integrity company Amplify Snacks (BETR), and we used August pullback to improve our cost basis. Since that scaling, BETR shares have once again languished, but commentary last week from United Natural Foods (UNFI) offered a confirming perspective. In United Natural’s earnings report it shared its supernatural net sales were up approximately 6.8% year over year and its supermarket channel net sales increased 8.3% year over year in the quarter. To me, that points to consumers continuing to embrace food that is good for you and bodes rather well for healthy snacking options offered by Amplify. Anecdotally, after visiting several Whole Foods locations over the weekend we can attest to a rebound in traffic and shopping bags.

We will continue to be patient with Amplify Snacks (BETR) shares as the company expands its product offering as well as its reach beyond the U.S. As we have said, we see Amplify as a potential acquisition candidate for PepsiCo (PEP), Snyder’s-Lance (LNCE), Post Holdings (POST), General Mills (GIS) or another snack-food company as they look to expand their presence in the “better for you food” snacking category.

  • Our price target on Amplify Snacks (BETR) shares remains $11

 

 

Recapping moves made earlier this week

As we get ready for what lies ahead over the coming weeks, we made some maneuverings with the Tematica Select List earlier this week. Those moves included adding two new Buy rated positions – LSI Industries (LYTS) and Nokia Corp. (NOK) – and we exited shares of CalAmp Corp. (CAMP). I’d note that one day after we added NOK shares to the Select List, UBS unveiled a “buy” rating on the shares.

Also, this week, our shares of Applied Materials (AMAT) were upgraded to “outperform” at RBC Capital Markets with a new $55 price target; if you’re thinking “that $55 price target sounds familiar” it’s because it has been our AMAT price target for months. As a reminder, Applied will host its 2017 Analyst Day on Sept. 27, and I see that offering an upbeat dialog for both its display  semiconductor capital equipment businesses

  • Our price target on LSI Industries (LYTS) remains $10
    Our price target on Nokia Corp. (NOK) remains $8.50
    Our price target on Applied Materials (AMAT) remains $55

 

Speaking of displays and price targets, yesterday we increased our price target on Universal Display (OLED) shares to $175 from $135, and we are evaluating potential stop loss levels for this position.

As we close this week’s issue, we’d suggest subscribers that missed yesterday’s comments on the current corn harvest as well as a potential longer-term disruptor to corn supply-demand dynamics and what it means for the Teucrium Corn Fund (CORN) shares on the Select List give them a whirl.

  • Our long-term price target on Teucrium Corn Fund (CORN) shares remains $25.
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.
WEEKLY ISSUE: What September May Bring

WEEKLY ISSUE: What September May Bring

Alright, alright, alright! Welcome back from the last bit of summer vacation, and it’s back to business for companies and stocks. We’ve moved from sleepy August to September, historically one of the most volatile months for stocks. Over the last few weeks, we’ve chin-wagged quite a bit over the items that could disrupt the market, but as happens from time to time, something appears out of thin air that is an unexpected disruptor. Last week that was the damage done by Hurricane Harvey, and now we have not just one but potentially two more hurricanes to contend with – Irma and Jose. Also adding to the news mix was the return of North Korea, following its nuclear test over the holiday weekend.

 

WE KNOW ONE THING SEPTEMBER WILL BRING . . . DRAMA

Normally after the Labor Day weekend, we see trading volume return to normal and the “B-team” that was covering trading desks replaced by the A-team. As they return, those players pore over data and happenings over the last few weeks that they’ve been away. This helps explain why September tends to be one of the more volatile months for stocks.

Another reason for the September volatility spikes is that in the coming days we’re going to see a return of investor conferences, and companies presenting at these events will give their first update since reporting 2Q 2017 earnings back in July. These updates will shape the tone of the second half of the year, and as we’ve shared previously, expectations call for meaningful EPS growth compared to the first half. In the coming days, we’ll start to see if those forecasts are as aggressive as we think they are given the speed of the economy.

We already know that Harvey and Irma will be and near-term economic shock to the system, likely resulting in a meaningful hit to GDP in the current quarter. In the coming days and weeks, we expect to hear retailers, restaurants, insurers, and others that have been impacted by Harvey reset expectations, and that is likely to weigh on the market near-term.  Eventually, we’ll see a snap back as rebuilding occurs in the coming months, but that will benefit a different set of companies than those affected. With that in mind, yesterday, we posted our thoughts on what the fallout could mean from the Harvey-Irma combination and shared a who’s who of stocks that are likely beneficiaries. With Jose being added to the mix, things could be even brighter for that list of companies we’re scoping out.

Cocktail Investing: Hurricane Harvey and its Impact on the Markets and EconomyAs we wait to see the incremental impact to be had from both Irma and Jose, let’s remember something we called out on last week’s Harvey focused podcast – the rebuilding effort, including federal relief, could trigger a sooner than expected debt ceiling coverage. Now we’re getting wind that the Republican Freedom Caucus is opposed to attaching a funding request for Hurricane Harvey aid to a debt limit increase and on the news that President Trump ended the Deferred Action for Childhood Arrivals (DACA) program. There has been no shortage of DC drama these last several weeks, and as we noted a few weeks ago, and with the debt ceiling discussion and tax reform taking center stage that DC drama is likely to extend its current run in the center ring.

We see this a one drama replacing another, with the one replaced being the Fed’s expected September balance sheet unwinding. In our view, following the near-term economic impact by Harvey and potentially the other hurricanes odds are the Fed will hold off with its balance sheet unwinding for a few more months. Even Federal Reserve Governor Lael Brainard argued this week the economic effects of Hurricane Harvey “raise uncertainties about the economic outlook for the remainder of the year” and argued for “a wait-and-see approach” before raising rates again. We’ve already seen another push out in rate hike expectations, and as balance sheet unwinding slips closer to the end of the year we’ll likely see yet another push out for the next Fed rate hike as well.

Putting these pieces together – hurricanes and the GDP impact, ongoing DC drama, and companies poised to reset guidance – it’s no surprise we’ve seen the Volatility Index perk up yesterday. Again, as the A-team on Wall Street has returned to their saddles. Most likely this means a thorough going over with an extra eye on risk management, as the herd looks to lock in profits.

We’ll be doing the same – revisiting thematic data points that reside in our own Thematic Signals and elsewhere – to do a review of positions on the Tematica Select List. As you saw with our recent exit of Dycom (DY) shares, we’re not ones to fall in love with the positions, but as you saw yesterday when we added to Costco (COST) shares when we see a mismatch between fundamentals and stock price performance, we’ll take action.

 

Thematic Data points this week — Apple & Universal Display

We have no companies reporting earnings this week, but we will be looking at thematic data points found in results from Safety & Security company American Outdoor Brands (AOBC), Cashless Consumption contender VeriFone (PAY) and Affordable Luxury company Restoration Hardware (RH). Next Tuesday, September 12th, Apple (AAPL) is set to take the wraps off its next iPhone iteration and this means we’ll finally get the official word on Apple’s use of organic light emitting diode displays. As we recently cautioned, there tends to be much build up ahead of these Apple events, and there is a history in the post-Steve Jobs era of them underwhelming. If that happens, we could see shares of Disruptive Technology position Universal Display (OLED) come under some pressure. Given the accelerating adoption of the technology across a variety of applications beyond smartphones, we would view any pullback as an opportunity.

  • At current levels, subscribers should “Hold” Universal Display (OLED) shares rather than commit fresh capital.
  • Our price target remains $135, but given expanding market applications for its products and licensing business, we’re inclined to be owners of the shares for the medium to longer term.

 

Be sure to check the website as well as your email for updates and other alerts as we share more thematic insights and actions during the week.

 

 

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.