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We expect Facebook will answer the call for more privacy safeguards

We expect Facebook will answer the call for more privacy safeguards

Over the weekend, the Sunday morning political talk shows put Facebook (FB) the spotlight following renewed privacy concerns and that is hitting FB shares this morning.

This privacy concern renewal stems from news that data firm Cambridge Analytica came to access information about potentially tens of millions of users without their explicit permission to build “a system to target individual U.S. voters with political advertisements.” As has become clear, Cambridge Analytica worked on Donald Trump’s 2016 presidential campaign and “and has come under scrutiny in special counsel Robert Mueller’s investigation into whether Trump associates colluded with Russia’s efforts to interfere in the U.S. election.” It’s been estimated that Cambridge improperly accessed private information from more than 50 million Facebook users, and was not deleted despite Facebook’s demands beginning in 2015. Per Facebook, it learned this month the data had by Cambridge was not destroyed.

This morning it is being reported that Republican Senator John Kennedy and Democratic Senator Amy Klobuchar are calling Facebook CEO Mark Zuckerberg to testify before Congress. Those two join a growing list of people calling for Facebook to explain how the data was used, what policies were violated, what legal implications are to be had, and why Facebook didn’t disclose what happened until late last week despite knowing of the abuse in 2015.

Clearly, there will be a number of questions to answer, and we see this as a renewed call for Facebook to mature as a company and instill better safeguards for user privacy. While its possible these headlines could lead to some short-term disruption in user activity and advertising spend, we see them as somewhat in the rearview mirror with Facebook already refocusing on quality user engagement. We’ll continue to monitor the developments, but our suspicion is Facebook has already been laying the groundwork to address such privacy concerns.

At the same time, the company continues to focus on not only video advertising, but also expanding its Watch tab, which should help drive both user engagement and advertising revenue. The same can be said about its move to broadcast live sporting events as well as develop its own proprietary content that would position the shares inside our Content is King investing theme. As we have said many times in the past, the only thing better than having one of our thematic tailwinds pushing on a company’s business is having two or more.

  • Our long-term price target for Facebook (FB) shares remains $225.
Forget ADAU with Facebook, it’s all about ARPU

Forget ADAU with Facebook, it’s all about ARPU

 

Last night Connected Society investment theme and social media platform company Facebook (FB) reported December quarter results that simply smashed expectations on a number of fronts. Of course, the market responded by trading the shares down roughly 5% in the aftermarket. Why? Well on the earnings call the management team talked changes that would impact time spent on Facebook — at least in the near term — as they focus more on “connecting people” and “healthy interaction” than the amount of time people spend on Facebook.

I see this announced strategy as part of the company’s response to criticism in the second half of 2017 over “fake news” and populist backlash, as well as part of its strategy to lure back users, particularly in the US and Canada where it reported a drop in daily active users for the first time. These changes led to a 5% reduction in average user time spent on Facebook in the December quarter and that revelation in the earnings press release sent FB shares lower in aftermarket trading last night.

Then came the earnings conference call, where the above pivot in strategy was reiterated, but Zuckerberg and crew also shared that ad impressions continue to grow and more importantly advertising pricing on the company’s platforms continues to climb. Also, on the call Facebook once again guided for a large uptick in spending, something we’ve heard several times before and yet it never seems to get in the way of Facebook meeting or beating bottom-line expectations.

As a reminder, the company is more than just the Facebook app and website and looking at the metrics across the company’s various social media platforms we are reminded of its growing presence in the advertising market. At Facebook proper, even though average daily active users (ADAU) dipping sequentially by 1 million to 184 million in the US and Canada in the December quarter, solid growth for that metric was had in Asia-Pacific and Rest of the World. Baked into the geographic figures are the 300 million daily average users at Facebook-owned Instagram vs. 178 million at Snap (SNAP) and 1.5 billion monthly active users at WhatsApp. As I look at those growth figures, I am rather nonplussed about the modest dip in Facebook average daily users.

Despite the dip in the US and Canada, revenue for the geography rose 27% quarter over quarter, which in our view solidifies the argument that growing advertising volume and pricing will more than offset short-term disruptions in average daily active users and usage. Outside of the US and Canada, Facebook continues to make solid progress in monetizing other geographies, with solid gains in Europe (31% quarter over quarter) as well as Asia-Pacific and Rest of World.

I see all of this reflected in Facebook’s overall average revenue per user (ARPU) that rose 22% sequentially (28% year over year) to $6.18. As Facebook looks to further monetize its various platforms, we continue to see further revenue and earnings growth ahead as advertisers look to be seen by buyers. As these platforms embrace video as part of our Content is King investing theme, we suspect Facebook will be a key beneficiary from the shift away from TV advertising and we are only in the early innings of that. In other words, the company remains well positioned as a Connected Society company.

  • Our price target on Facebook (FB) shares remains $225.
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

 

Businesses flock to Instagram

The adoption of social media by companies to reach customers, share its wares, drive revenues and build its brands continues. Amid the battle between Facebook and LinkedIn, we are seeing businesses embrace Instagram, in some cases as its only web presence, to reach customers. Even as we peruse Instagram, we are seeing more companies have profiles as well as advertise. The visual nature of the platform, in our view, gives it a hefty leg up over Twitter and because the images “last” we say the same holds compared to Snap. Instagram is also a mobile-first platform, which means its appealing to smartphone users, the fastest growing category for digital commerce so far this holiday season. How long until the Facebook bears begin to wonder if Instagram’s success will eat into demand for Facebook?

Instagram announced this morning that it now has 25 million active business profiles, up from 15 million in July.

Instagram also says that more than 80 percent of Instagram accounts follow a business, with 200 million users visiting a business profile every day.

The growth is impressive since Instagram only launched these business profiles — which allow for more functionality in the profile itself, as well as access to additional analytics — about a year and a half ago.

Vishal Shah, director of product for Instagram Business, said that nearly 50 percent of business profiles don’t link to an outside website, suggesting that they see Instagram as their primary or sole online presence.

Businesses need to be smart about what they post to the feed and in their Instagram Stories, but the distribution strategy goes beyond that, to things like search and hashtags.

In fact, Instagram says that two-thirds of visits to business profiles come from users who don’t follow that profile. And one of the ways that Shah wants to grow the business product is by providing more detail about where visitors come from and what they do “downstream,” during or after that visit.

Source: There are now 25M active business profiles on Instagram | TechCrunch

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: Adding this digital advertising platform company to the Select List

Special Alert: Adding this digital advertising platform company to the Select List

  • We are adding shares of Trade Desk (TTD), a company that straddles our Connected Society and Content is King investing themes, with an $80 price target and a Buy rating.
  • Trade Desk will report its 3Q 2017 earnings after Thursday’s market close; while we don’t expect any post-earnings weakness, our strategy will be to any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.
  • This is a new addition to the Select List, and at this time there is no stop loss recommendation.

The Tematica Investing Select List has been and in our mind should continue to benefit from the accelerating shift toward digital advertising that is captured in the Facebook (FB), Alphabet (GOOGL) positions. This past earnings season was a robust one for both with advertising facing businesses growing leaps and bounds compared to year-ago levels. Let’s keep in mind, that’s before either one has put a meaningful dent in broadcast TV, the holy grail of advertising spend. The thing is both companies are focused on that with Watch at Facebook and several properties at Alphabet’s YouTube.

From the “platform to be shifted to” space, we have that pretty well covered with FB and GOOGL shares. But what about from the ad spending perspective? What tools and services are they using to help choose and optimize their advertising spend?

This brings us to Trade Desk, (TTD), a technology company that provides a self-service, cloud-based platform for ad buyers. Through this platform, which puts Trade Desk in the high-margin software as a service camp, ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across 500 billion digital ad opportunities per day across a variety of formats. These include display, video, audio, native and social, on a multitude of devices, including computers, mobile devices, and connected TV.

We’ve heard the cord cutting stories, the shift to mobile video consumption and how traditional cable companies are losing subscribers to streaming and other over the top services, especially with Millennials according to brand Intelligence firm Morning Consult. It’s not just the Millennials, however, given the steep costs associated with cable. The average cable bill in America is over $100 a month, which is almost 50% more than 10 years ago, and as we’ve pointed out previously debt-ridden consumers that have seen modest wage growth are looking for ways to cut back their spending. In some cases, it’s a choice between cable vs. the combination of streaming and mobile services.

What this means is Trade Desk is in the running not just for the $50 billion display advertising market or the $235 billion TV advertising market, but the $650 billion total global ad spending market. As more of that market shifts to digital platforms, which we are seeing per Facebook and Alphabet, it expands Trade Desks available market. Currently it’s estimated that only 2% of the $650 billion total global ad spending market has embraced programmatic advertising like that offered by Trade Desk. While we don’t expect programmatic advertising to become 100% of the global ad spending market any time soon, modest better growth to 4%-5% or better paves the way for significant growth ahead at Trade Desk.

We have often said that shifts like this take time to materialize, but much like a turning tanker when they pick up momentum the shift accelerates significantly. We are starting to see that in programmatic advertising and we will watch for confirmation among broadcast TV and agency advertising spend in the coming quarters.

As this occurs, Trade Desk is one of the preferred partners. Recently, the company again earned the top Net Promoter Score for Demand Side Platforms (DSP) in the latest Programmatic Intelligence Report from Advertiser Perceptions. The ranking was based on survey findings of more than 360 ad buyers at both brands and agencies. As grand as that is, we find even more solace in Trade Desk’s customer base, which coming into 2016 measured more than 560 with the top three customers being among the who’s who in advertising — Omnicom Group Inc. (OMC), WPP plc and Publicis Groupe (PUBGY) – each of which represented more than 10% of gross billings in 2016.

In reviewing 3Q 2017 results from Trade Desk’s top customers, Omnicom reported overall advertising up more than 4% on an organic basis. By comparison WPP reported its 3Q 2017 was up 1.1% year over year, with stronger growth of more than 4% for its Advertising, Media Investment Management business. Even Interpublic Group (IPG), which is not a top three Trade Desk customer, reported “advertising business had solid U.S. growth in both our larger networks and our domestic independence.”

This tells us the overall advertising market continues to grow, which is a positive for Trade Desk. What we find even more confirming for adding TTD shares is that on its earnings call, Interpublic cited significant new digital assignments during the quarter, including a new U.S. digital project from McDonald’s (MCD). Interpublic’s Chairman and CEO, Mike Roth, also shared that clients bringing their digital advertising spend in-house, which in our view bodes well for Trade Desk and its programmatic platform.

Our strategy with Trade Desk will mimic that of Apple (AAPL) – we’re adding TTD shares ahead of earnings this Thursday after the market close, and should the report disappoint we’ll look to scale into the shares given the ongoing shift toward digital advertising. Consensus expectations have it serving up EPS of $0.27 on revenue just shy of $77 million.

We’d note the favorable results at Facebook and Alphabet as well as the track record at Trade Desk for handily beating analyst expectations over the last year. That same track record has led to 2018 EPS expectations climbing to $1.70 from $1.34 a few months ago and that compares to 2017 EPS forecasts that now call for $1.43, up from $1.08 previously. To really put this into context, Trade Desk delivered EPS of $0.89 in 2016, which means its compound annual growth rate over the 2016-2018 period is significant at 38%.

Aside from actual revenue and EPS results, we’ll be assessing the mix of advertising spend, particularly between new and existing customers, as well as customer retention metrics. In the June quarter, Trade Desk had customer retention of 95% with roughly 87% of its 2Q 2917 gross spend from existing customers, which are customers that have been with Trade Desk for over a year.

In terms of the company’s balance sheet, it exited the June quarter with $27 million in debt vs. cash and short-term investments of just over $115 million. Over the past trailing 12 months ending in June, the company generated $40.4 million and $25.8 million of operating cash flow, and free cash flow respectively.

Our $80 price target on TTD shares equates to a PEG ratio of just over 1.2x when applied to the consensus 2018 EPS view of $1.70 per share. As the company continues to benefit from the accelerating shift to digital advertising, odds are we will see that PEG multiple expand as well, just like we’ve seen with Alphabet and Universal Display (OLED). That likely means we could be boosting our TTD price target several times over the coming quarters.

  • We are adding shares of Trade Desk (TTD), a company that straddles our Connected Society and Content is King investing themes, with an $80 price target and a Buy rating.
  • Trade Desk will report its 3Q 2017 earnings after Thursday’s market close; while we don’t expect any post earnings weakness, our strategy will be to any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.
  • This is a new addition to the Select List, and at this time there is no stop loss recommendation.

 

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

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

 

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

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

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

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

 

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

Tencent set to Stream 2017, 2018 and 2019 NFL games in China

Tencent set to Stream 2017, 2018 and 2019 NFL games in China

We’re not only seeing a blurring of our Content is King and Connected Society investing themes here in the U.S., we’re seeing in China as well in a deal between Tencent and the NFL. Live news and sports were two of the holdouts in streaming content, but with Google (GOOGL) adding streaming news to YouTube;  Amazon (AMZN), and Facebook (FB) streaming live sporting events this fall, and Disney (DIS) bringing a streaming ESPN service to market next year we think the TV broadcast only business is resembling the newspaper industry around 2001-2002.

 

Tencent is to become the exclusive live streaming partner in China for the National Football League’s American football games. The social media, games and streaming giant will air live and on-demand selected preseason games, all Thursday Night Football, Sunday Night Football and Monday Night Football games, as well as selected Sunday afternoon games, the playoffs, the Pro Bowl and the Super Bowl for the 2017, 2018 and 2019 seasons. The deal also includes non-game NFL content.

NFL live games and content will be available through Tencent’s NFL sections on both mobile and desktop terminals including Tencent Sports, QQ.com, Tencent Video, Kuai Bao, Penguin Live, the Tencent Sports app, the Tencent Video app, the Tencent News app, as well as its social networking services, QQ and WeChat. At the end of June, the combined monthly active users of Tencent’s social communications platforms, Weixin and WeChat, was over 960 million.

Source: Tencent to Stream NFL in China | Variety

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

 

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

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

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

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

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

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

Content is King movie studios eyeing Connected Society solutions like  Apple iTunes rentals

Content is King movie studios eyeing Connected Society solutions like  Apple iTunes rentals

 

Through our thematic lens, we see this as Content is King meeting the Connected Society, a theme that has led to much creative destruction over the last several years. With Netflix (NFLX), Amazon (AMZN) and now even Apple (AAPL) moving into proprietary content that is streamed to wherever and whenever consumers want, perhaps it’s about time the movie studios ranging from Sony (SNE) to Disney (DIS) and 21st Century Fox (FOXA) get on board. Should it come to pass, it will smack Regal Cinema (RGC), AMC (AMC) and other movie theater businesses right in the high margin snack business. We suspect the Cash-strapped Consumer is hoping for such a move to happen.

Movie studios looking to set up early-access rentals with companies like Apple and Comcast may reportedly push ahead with those negotiations and skip revenue sharing with theater chains, if the latter don’t reduce their demands.Early-access rentals would let people stream movies through services like iTunes just weeks after their premieres, possibly while they’re still in theaters. To appease exhibitors, studios have discussed a revenue split, but balked at proposed long-term commitments up to 10 years, according to Bloomberg sources. For the end customer, early rentals would likely cost between $30 and $50.

Source: Movie studios may sidestep theater chains in deals for early Apple iTunes rentals