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

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

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

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

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

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

 

Watching the Fed minutes this afternoon

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

 

A first pass from CES 2018

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

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

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

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

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

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

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

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

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

 

 

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

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

 

KEY POINTS FROM THIS SPECIAL ALERT:

  • Tematica Options+ Subscribers: We are selling half the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days. We are also boosting our stop loss to $55 from $32.50.*
  • With today being Cyber Monday, we will be revisiting our Amazon (AMZN) price target as the day’s sales tallies are published.
  • We continue to see Amazon (AMZN), Alphabet (GOOGL), and United Parcel Services (UPS) as beneficiaries of the accelerating shift toward digital commerce.

 

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

 

Holiday shopping data is confirming Our Connected Society Investment Theme on several fronts

We hope you had an enjoyable Thanksgiving holiday, and where appropriate you took advantage of retail sales, both in-store and on digital platforms. Over the coming paragraphs, we’re going to review the weekend spending data that was bullish for our Connected Society investing theme as well as several Tematica Investing Select List positions and preview what’s expected today, Cyber Monday, but the quick takeaway is it confirmed the accelerating shift toward digital commerce that is fueling our positions in Amazon (AMZN) and United Parcel Service (UPS), and to a lesser degree Alphabet (GOOGL) given its search and shopping businesses.

According to Adobe Systems (ADBE), U.S. shoppers splurged more than $1.52 billion online by 5 PM ET on Thanksgiving and went on to part with more than $2.85 billion for the day in full. By comparison, that compares to $1.93 billion in online Thanksgiving sales in 2016. What we found even more incredible was the percentage derived from smartphones – a record 46% according to Adobe.

Turning to Black Friday, per e-commerce platform company Shopify, customers spent as much as $1 million per minute on the internet. Adobe reports that shoppers spent a record-high of $5 billion for the day, up from $3.34 billion in 2016. Another interesting data point, marketing firm Criteo reports that roughly 40 percent of Black Friday online sales were made on mobile devices Pairing Thanksgiving and Black Friday sales at the 100 largest U.S. Web retailers, Adobe found $7.9 billion was spent, marking an 18% increase compared to 2016.

Reports for Black Friday were less favorable for brick & mortar retailers, with many shoppers flocking to stores; however many of them were there only to “showroom” the merchandise. For those unfamiliar with that term, “showrooming” means eying items in person while waiting to complete the actual transaction online, while continuing to bargain hunt online or via mobile. Estimates from ShopperTrak said foot traffic “decreased less than one percent when compared to Black Friday 2016.” Looking at both Thanksgiving Day and Black Friday, however, ShopperTrak found in-store foot traffic was actually down nearly 2% compared to the same two days last year. Not good for brick & mortar at all, but with some context, we see it is simply more of the same given disappointing same-store sales reported by retailers of late.

What we found most interesting in retailer comments was the growing verbiage toward digital commerce . . . 

While some may call it pandering, we see it as more confirmation of the shift we’ve been describing. Case in point, Kohl’s (KSS) CEO Kevin Mansell shared that while the retailer delivered a “record-breaking” Thanksgiving, more than 16 million visits were made to kohls.com, Kohl’s said, outpacing any prior traffic or sales precedents. Mansell went on to say the company fulfilled roughly 40% more orders that were bought online and picked up in stores when compared with Black Friday of last year. Another example was had at J.C. Penney (JCP), which shared that traffic at jcp.com increased at a double-digit pace throughout the week, with most shoppers visiting the site from their mobile devices. And on Thanksgiving Day, Penney’s website received the most visits of any day so far this year.

Rounding out the holiday shopping weekend, today is Cyber Monday and it is expected to become the largest online shopping day in history, generating $6.6 billion in sales, up  16.5% compared to last year’s $5.6 billion according to Adobe. Here’s the thing — if this Cyber Monday sets a new online record, it will be the sixth year in a row the day has done so.

Stepping back, we see all the weekend’s data confirming the shift to digital commerce that has been at the heart of our position in Amazon. The same shift towards online is also driving the search and shopping business at Alphabet and fueling the season surge at United Parcel Service.

As this shopping shift is occurring, we are also seeing Amazon build its own private-label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney and Sears (SHLD). Of course, there is more than enough reason to think there will be even more pain on the way, as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. This tells us is there is more trouble ahead for brick & mortar retailers as these companies sacrifice profits to win revenue. That isn’t exactly a sustainable business model and one that tends to lead to declining earnings per share. In our view, those that lack a competitive weapon in its back pocket — weapons like Amazon’s Amazon Web Services or Costco Wholesale’s (COST) higher margin membership fee business — are stocks to be avoided as retailer pain continues.

  • Our price target on Amazon is $1,250 but based on the online shopping strength thus far and what’s expected today we are reviewing that target.
  • As we review our AMZN price target, we are doing the same for Alphabet (GOOGL) shares. Currently, that price target sits at $1,150.
  • Our price target on United Parcel Service (UPS) shares remains $130.
  • Our price target on Costco Wholesale (COST) shares remains $185.

 

Tematica Options+ Subscribers: Trimming back our Amazon call position

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

As the confirming holiday shopping data is coming in, we’re seeing Amazon shares respond accordingly and that is propelling the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) higher this morning. As we share today’s thoughts with you the AMZN calls are trading past $76.62, which equates to a gain of more than 135% since we added the position just 7 days ago to the Tematica Options+ Select List. As much as we like quick gains, we also like to be prudent and in this case, that means trimming the position back, while leaving a portion intact to capture additional gains to be had this holiday shopping season.

  • We are selling half of the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days.
  • As we make this trade, we are also boosting our stop loss on those calls to $55 from $32.50, which should ensure a profit of at least 69% on the remaining call position.

 

 

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.

 

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

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

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

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

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

 

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

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

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

 

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

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

 

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

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

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

 

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

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

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

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

 

Thursday brings Apple and Universal Display earnings

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

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

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

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

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

 

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

  • Our price target on Apple (AAPL) remains $200.
WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

Monday was one of those sort-of holidays that saw banks, the post office and schools closed, but domestic stock markets and a number of other businesses open. The result was once again a more subdued start to the week that leads into what is poised to be a focal point for the stock market as 3Q 2017 earnings kickoff. Over the last several days, we saw through earnings from restaurant company Darden (DRI) and Cal-Maine Foods (CALM) and this week the negative 2017 reset from coatings company Axalta Coating Systems (AXTA). This tells me that not only has Wall Street underestimated the impact of September’s hurricane trifecta — a fact we saw in last Friday’s September Employment Report — but it has likely overestimated the current speed of the economy as well.

The next few days will give way to several economic reports that will more fully shine a light on the true speed of the economy, and they will help set the table for what is to come over the next few weeks as literally thousands of companies report. As subscribers, you know through our weekly Thematic Signals and our Cocktail Investing Podcast that I co-host with our Chief Macro Strategist Lenore Hawkins, we are constantly scrutinizing data points with our thematic lens and assessing the market.

Now let’s take a look at our overall market view, which is one of the key backdrops when it comes to investing – thematic or otherwise. As we shared on last week’s podcast, the domestic stock market continues to grind its way higher ahead of 3Q 2017 earnings. This march higher is being fueled in part by the return of investor greed as measured by CNNMoney’s Fear & Greed Index. The question we are increasingly pondering is what are those late to the party seeing that allows them to get comfortable with enough upside to now jump into a market that is trading at more than 19x expected 2017 earnings?

With the market priced to perfection and expectations running high, odds are we are bound to see some disappointment. The fact that margin debt is running at record levels is not lost on us here at Tematica, and it has the potential to exacerbate any near-term bump or pullback in the market.

This has us holding steady with the Tematica Select List, but it doesn’t mean we are being idle. Rather, we are scrutinizing contenders and revisiting price points at which we would scale into existing positions. Not quite our 2017 holiday shopping list, but one that as we approach Halloween could be ripe for harvesting.

 

 

Checking in on some of our outperformers

We’ve benefitted from this push higher as the Select List’s positions in LSI Industries (LYTS), Amplify Snacks (BETR), USA Technologies (USAT), Amazon (AMZN), Alphabet (GOOGL) and International Flavors & Fragrances (IFF) have outperformed the month to date move in the S&P 500. With USAT shares, this has them closing in on our $6.50 price target, while the others have ample upside to our respective price targets.

We continue to rate these stocks as follows:

  • Our price target on LSI Industries (LYTS) remains $10.00
  • Our price target on Amplify Snacks (BETR) remains $10.50
  • Our price target on Amazon (AMZN) remains $1,150
  • Our price target on Alphabet (GOOGL) remains $1,050

With USA Technologies (USAT) shares, we will continue to keep them on the Select List and as we reassess our Thematic Signals and other data points for additional upside to be had relative to our $6.50 price target.

The same is true with International Flavors & Fragrances (IFF), given the accelerating shift away from sugar toward food that is good for you vs. the modest upside to our current $150 price target.

 

It’s not all bad news for the underperformers however

While we like to focus on the outperformers, we tend to spend as much, if not more time, on the ones that are underperforming. Currently, that means shares of Costco Wholesale (COST), Nokia (NOK), MGM Resorts (MGM) and recently added United Parcel Service (UPS).

In reverse order, shares of Connected Society derivative company UPS shares came under pressure following comments that Amazon is once again flirting with expanding its own logistics business. While this may happen, it will take years to replicate the hub and spoke to home delivery service currently offered by UPS that is poised to benefit from the accelerating shift to digital commerce this holiday shopping season. We remain bullish on this position and expect the shares to rebound as we move into the 2017 holiday shopping season. We will look to scale into UPS shares closer to $110 should such a pullback in the shares emerges this earnings season.

Shares of Guilty Pleasure company MGM Resorts continue to languish following the recent Las Vegas shooting. In our view, it will take some time for the perception of the business to recover. As that time elapses, we’ll look to improve our cost basis following the better than expected August Nevada gaming data. Below $30 is where we are inclined to make our move, and our price target stands at $37.

We continue to see favorable data on 5G testing and deployments that bode very well for Nokia’s intellectual property business as well as its communications infrastructure business. Much like MGM shares we will be patient and look to opportunistically improve the cost basis on this Disruptive Technologies Select List position.

We have a more detailed look at Cash-Strapped Consumer company Costco down below, but as you’ll soon read we continue to favor the shares despite some concerning developments.

 

So, what’s up with Costco Wholesale?

As we mentioned above Costco is one of the recent underperformers and it comes following last week’s better than expected quarterly earnings results. The issue is that its the earnings call Costco shared that it is seeing a slowdown in membership rates, which Wall Street took to mean “Here comes Amazon!” While we agree that Amazon is set to continue disrupting traditional retail as it leverages Whole Foods into grocery and meal kits, and continues to focus on apparel, Costco’s issue is it opened 16 new warehouses during the first 9 months of its recently completed fiscal year, so odds are it would see some slowing in membership growth.

For those not convinced that Costco’s business is thriving we would point out the following:

  • September 2017: Net sales up 12%
  • August 2017: Net sales up 10.0% year over year with comparable stores sales up 7.3% (up 5.9% excluding gasoline prices and foreign exchange)
  • July 2017: Net sales up 8.8 percent year over year with comparable store sales up 6.2% (up 5.3% excluding gasoline prices and foreign exchange)
  • June 2017: Net sales up 7.0% year over year with comparable store sales up 6.0% (up 6.5% excluding gasoline prices and foreign exchange)

Looking at that data, we see Costco not only as a company that has continued to improve net sales month over month, but one that is hardly suffering the same fate as traditional brick & mortar retailers. Moreover, we would point out the company had 741 warehouses in operation during the August 2017 quarter, up from 715 a year ago. This led to a 13% increase in its high margin Membership Fee revenue, which accounted for nearly all of its net income during the quarter.

As we have said before, the power in Costco’s business model is the warehouses and membership fee income, and we see this continuing to be the case. As part of our Connected Society theme, we will continue to monitor consumer acceptance of delivered grocery. This includes Costco’s new two-day delivery services for both dry groceries and fresh foods that will be free for online orders exceeding $75 from 376 U.S. Costco stores. Unlike many brick & mortar retailers, Costco is not standing around and watching its competitors outflank it, rather it is responding. To us, this suggests the recent pullback is overdone.

  • We continue to have a Buy on Costco Wholesale (COST) shares, and our price target remains $190.

 

 

 

 

Boosting Price Target on UPS Shares Amid eCommerce Surge

Boosting Price Target on UPS Shares Amid eCommerce Surge

Key Points from this Post:

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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