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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

Tencent scales thematic investments in payments, AI and cloud

Tencent scales thematic investments in payments, AI and cloud

Our Content is King theme isn’t the only one getting a lot of attention this week as more companies look to invest not only in payments, which we see as Cashless Consumption but also artificial intelligence, a slice of our Disruptive Technologies theme. As we look at these moves, we are reminded of the global nature of our investing themes. This means that Amazon (AMZN), MasterCard (MA), Visa (V), Facebook (FB), Alphabet (GOOGL), Apple (AAPL), PayPal (PYPL) and the like need to be aware of moves made by Tencent (TCHEY), Alibaba (BABA) and other players outside the US.

Tencent, the Chinese mobile games and social media company, is gearing up to increase its investments in online payments, cloud services and artificial intelligence.Still, with competition on the rise in the digital payments market, the investments are necessary. “We think there is still a lot of growth potential from Tencent’s cloud and payment business,” BOCOM International Analyst Connie Gu said in the Reuters report.

China’s Tencent isn’t only investing in artificial intelligence, payments and cloud services. Earlier this month, it showcased how it is also investing in other areas. Essential Products, the smartphone company that was started by Andy Rubin — the creator of the Android mobile operating system — raised $300 million in venture funding from a cadre of investors, including Tencent. According to a news report in The Wall Street Journal, the company announced the list of investors betting it can take on Apple and Samsung Electronics in the smartphone market, reported the paper.

Source: Tencent Increases Investments In AI, Payments | PYMNTS.com

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.

 

 

Washington’s Attack on Online Advertising Revenues Disguised as Tax Reform

Washington’s Attack on Online Advertising Revenues Disguised as Tax Reform

When we look at the creative destruction associated with our Connected Society investing theme, on the positive side we see new technologies transforming how people communicate, transact, shop and consume content. That change in how people consume TV, movies, music, books, and newspapers has led to a sea change in where companies are spending their advertising dollars given the consumer’s growing preference for mobile consumption on smartphones, tablets and even laptops over fixed location consumption in the home. This has spurred cord cutters and arguably is one of the reasons why AT&T (T) is looking to merge with Time Warner (TWX).

Data from eMarketer puts digital media advertising at $129.2 billion in 2021, up from $83 billion this year with big gains from over the air radio as well as TV advertising. As a result, eMarketer sees, “TV’s share of total spend will decline from 35.2% in 2017 to 30.8% by 2021.”

That shift in advertising dollars to digital and mobile platforms away from radio, print and increasingly TV has created a windfall for companies like Facebook (FB) and Alphabet (GOOGL) as companies re-allocate their advertising dollars. With our Connected Society investing theme expanding from smartphones and tablets into other markets like the Connected Car and Connected Home, odds are companies will look to advertising related business models to help keep service costs down. We’ve seen this already at Content is King contenders Pandora (P) as well as Spotify, both of which use advertising to allow free, but limited streaming music to listeners. Outside the digital lifestyle, other companies have embraced this practice such as movie theater companies like Regal Cinema Group (RGC) that use pre-movie advertising on the big screen to help defray costs.

As we point out, however, in Cocktail Investing, investors need to keep tabs on developments in Washington for they can potentially be disruptive to business models and that could lead to revisions to both revenue and earnings expectations. Case in point, current Ways and Means Committee Chairman Kevin Brady recently acknowledged that there “may be a need” to look at some of the revenue raisers to complete his 2017 tax reform proposal. One item was revisiting the idea to convert advertising from being a fully deductible business expense – as it has been for over a century – to just half deductible, with the rest being amortized over the course of a decade.

The sounds you just heard was jaws dropping at the thought that this might happen and what it could mean to revenue and earnings expectations for Facebook, Alphabet, Twitter (TWTR), Snap (SNAP), Disney (DIS), CBS (CBS), The New York Times (NYT) and all the other companies for which advertising is a key part of their business model.

Other jaws dropping were those had by economists remembering the 2014 IHS study that showed the country’s $297 billion in advertising spending generated $5.5 trillion in sales, or 16% of the nation’s total economic activity, and created 20 million jobs, roughly 14% of total US employment at the time. Those same economists are likely doing some quick math as to what the added headwind would be to an economy that grew less than 1 percent in 1Q 2017 and how it would impact future job creation should an advertising tax be initiated. It’s hard to imagine such an initiative going over well with a president that is looking to streamline and simplify the tax code, especially when one of his key campaign promises was to lower tax rates.

As we talked on the last several Cocktail Investing Podcasts, there are several headwinds that will restrain the speed of the domestic economy – the demographic shift and subsequent change in spending associated with our Aging of the Population investing theme and the wide skill set disparity noted in the monthly JOLTs report that bodes well for our Tooling & Retooling investment theme are just two examples. Our view is incremental taxes like those that could be placed on advertising would be a net contributor to the downside of our Economic Acceleration/Deceleration investing theme.

That’s how we see it, but investors in some of the high-flying stocks that have driven the Nasdaq Composite Index more than 17 percent higher year to date should ponder what this could mean to not only the market, but the shares of Facebook, Alphabet, and others. In our experience, one of the quickest ways to torpedo a stock price is big earnings revisions to the downside. With the S&P 500 trading at more than 18x expected 2017 earnings, a skittish market faced with a summer slowdown and pushed out presidential policies could be looking for an excuse to move lower and taking the wind out of this aspect of the technology sails could be it.

Apple’s WWDC17: An event lacking vision from a company without a visionary

Apple’s WWDC17: An event lacking vision from a company without a visionary

Yesterday, Apple (AAPL) held its annual World Wide Developer Conference (WWDC) at which CEO Tim Cook showcased a number of announcements. While we tend to be Apple devotees when it comes to the hardware and its ease of use, in taking a few steps back, our view is this year’s WWDC is it was one largely filled with refinements and incremental additions. Not entirely surprising, given the fact that Apple is now led by an expert operations manager, Tim Cook, and not a visionary like Steve Jobs. As we see it, Apple will either need to bring in some visionary expertise, or perhaps, and more likely, use it’s war chest of $250 billion to buy some vision in the form of acquisitions, but that’s another story.

We have not been buyers of Apple shares as of late — despite being avid fans, if not a lover of its products — given the transition-like nature of the product cycle that keeps Apple arguably reliant on the iPhone. Instead, for subscribers to our Tematica Research premium service, we’ve recognized the Apple-related opportunity from a different perspective – one that intersects with our tendency to “Buy the Bullets, Not the Guns” and several of our investing themes — Connected Society, Content is King, Cashless Consumption and Disruptive Technologies – with great success along the way. Examples include Universal Display (OLED), Nuance Communications (NUAN) and Applied Materials (AMAT), which are up more than 127 percent, 23 percent and 28 percent, respectively since being added to the Tematica Select List.

In our view, Apple is in a tough spot after setting the bar so high for so long. It too now has to compete with how it once wowed audiences and consumers as it updates existing products and tries to find its footing with new ones. Given its size, install base and the fact that its products are for the most part so simple to use, Apple isn’t likely to go the way of Kodak or Xerox anytime soon.

Getting back to the conference, on the smaller side, there were announcements like Amazon’s (AMZN) Prime Video coming to Apple TV and the upgrades to its Mac line. The real interest was in what the latest release of its mobile operating system iOS 11 brings, with a surprise in that this next iteration is likely to make the iPad a device to be embraced for both business as well as personal use. Perhaps the best worst kept secret heading into the event was Apple’s move into the connected speaker market, and yes Apple did take the wraps off HomePod, which looks to be Apple’s second if not a third potential hub in the home. The first two hubs being the iPhone and Apple TV, both of which connect with Apple’s HomeKit.

 

 

Interestingly, Apple is leading HomePod with music first and as a connected device with Siri second. Perhaps this is because if you’ve ever asked Siri the same questions as you might ask Amazon Alexa, one tends to realize that Siri isn’t the sharpest knife in the drawer, as it lacks the backing of Amazon’s Amazon Web Services and artificial intelligence. This strategy is also likely aiming to spur subscriptions to Apple’s Apple Music service; we can’t tell you how many times Apple shared it offers more than 40 million songs during the keynote presentations. Will this be a viable competitor to Sonos’s smart speakers when it comes to sound quality? Could the HomePod spur Amazon or Alphabet to acquire Sonos? Time will answer both of those questions.

Apple did tout Siri Intelligence several times during yesterday’s presentations, but this appears to be an area of continued investment as Apple catches up to Amazon and Google rather than leapfrogging them in the process and redefining the category. With Amazon’s strategy to make Alexa compatible with autos, the likes of Ford (F) and Volkswagen, as well as consumer appliance companies such as Whirlpool (WHR), it looks like the old OS war between Microsoft and Apple could be played out again in the voice digital assistant space. This raises several questions in our minds – Will Apple license Siri for use outside of Apple products? Will Amazon have the same issues Microsoft had with Windows and device compatibility? Fodder for thought and what it may mean for the future of these interfaces.

Yes, there was some cool new Apple stuff, like the Do Not Disturb While Driving feature, the ability to drag and drop with iOS 11, which in our view was sorely missing for the iPad and Apple’s foray into Virtual Reality (VR). But again, the head turning “wow” factor just wasn’t there. Even with HomePod, it will be interesting to see how it stacks up against Amazon’s Echo products as well as Alphabet’s (GOOGL) Google Home in the coming months. One would have to think these companies are prepping newer models, perhaps with better sound capabilities, ahead of the year-end holiday season.

The problem as we see it is Apple is trapped inside a near yearly refresh rate that makes it challenging to deliver breakthrough features each and every year. Even the new iOS name, iOS 11, is uninspiring.

Who has a blowout birthday when they turn 11?

Even the naming conventions for the new macOS and iMac were iterative in nature with Craig Federighi, Apple’s senior vice president of Software Engineering, getting a good nature laugh along the way.

Now with the WWDC keynote behind us, the next event to watch for Apple will be the unveiling of the much-discussed iPhone 8 model later this year. While Apple did sneak peek a few products yesterday, we heard nothing about the next iPhone model and as the news cycle turns away from WWDC we expect investor speculation to run rampant when it comes to this device later this summer. With 66 percent of Apple’s sales coming from the iPhone over the last two quarters, it’s the one product that Apple has to get right. Odds are it will, and that device will keep Apple as one of the key players in our Connected Society investing theme as its other initiatives – Virtual Reality, Apple Pay, Apple Watch and Apple TV – feel the lift of our Disruptive Technology, Cashless Consumption, Fountain of Youth and Content is King themes.

As these tailwinds blow, our Tematica Select List will surely continue to reap the benefits.

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

In this Week’s Issue:

  • Deploying Several Defensive Measures to Protect Our Gains
  • Alphabet (GOOGL), Asset-lite Business Models
  • Applied Materials (AMAT), Disruptive Technology
  • Universal Display (OLED), Disruptive Technology
  • Dycom Corp. (DY), Connected Society
  • Facebook (FB), Connected Society
  • USA Technologies (USAT), Cashless Consumption

 

Amid the market’s choppy behavior over the last week, the reality is it was little changed as measured by the performance of the S&P 500. In recent days, the market’s focus has once again turned to Washington, first with Treasury Secretary Steve Mnuchin testifying to the Senate Banking, Housing, and Urban Affairs Committee in which he reiterated that the Trump administration’s goal of 3 percent or better GDP is achievable provided “we make historic reforms to both taxes and regulation.” That was followed up this week with the release of President Trump’s 2018 budget, titled A New Foundation for American Greatness, which includes $639 billion slated for military spending that would allow the Pentagon to bolster its ranks by more than 56,000 troops, buy more helicopters and trucks for the Army, boost the Navy’s fleet and pay for more stealth warplanes for the Air Force.

From a thematic perspective that is shot in the arm for another aspect of our Safety & Security investing theme following last week’s high profile WannaCry ransomware attack. While we have PureFunds ISE Cyber Security ETF (HACK) on the Tematica Select List, we’ll look to uncover well-positioned “bullets” for the Select List in the coming days to round out our exposure to this spending tailwind.

Speaking of our Safety & Security investing theme, if you missed last week’s Cocktail Investing Podcast in which Tematica’s Chief Macro Strategist, Lenore Hawkins and I discussed the WannaCry attack, ransomware and cyber spending with Yong-Gon Chon, CEO of cyber security company Focal Point, click here to download it on iTunes. My advice would be to subscribe on iTunes so you get every podcast each and every week, and remember they are absolutely free.

Deploying Several Defensive Measures to Protect Our Gains

As the stock market has moved higher and higher, it’s not lost on us that a number of holdings on the Tematica Select List have been inching up week after week, closing the gap on our respective price targets — that’s a nice problem to have, isn’t it?

Obviously, we’re not really going to complain about positions like Dycom (DY)or Universal Display (OLED) outperforming the market so far in 2017, but we will look at remaining upside to our price targets with an eye to protect subscribers from piling in at levels that don’t afford sufficient upside to warrant taking on potential risk. Yes, it’s the RISK and REWARD that we look at when assessing whether a position makes the cut onto the Select List.

With less than 10 percent upside to respective price targets, we are downgrading several stocks to “Hold” from “Buy.” Unlike Wall Street traders, our Hold rating is just that – maintain the position to capture additional upside, not “Hold means Sell.” For example, even though there is just 8 percent upside to our Alphabet (GOOGL) price target, there are enough tailwinds blowing that could lead to us to revise our price target upward over the coming months. With that mind, we are now rating shares of Alphabet, CalAmp (CAMP), International Flavors & Fragrances (IFF), and Facebook (FB) as Holds. As we do this, we’ll be mindful of pullbacks in the market that offer buying opportunities as well as potential upside to existing price targets.

We’re also making some prudent changes with regard to stop losses, and with that in mind we will make the following adjustments:

  • Boost our stop loss on IFF shares to $125 from $115, which will lock in a nice profit given our $120ish entry price.
  • Raise the stop loss on our PowerShares Exchange-Traded Fund Trust (PNQI) shares to $98 from $90, which cements at least a 17 percent return in the shares.
  • Increase our stop loss on Universal Display (OLED) shares to $85 from $70, which will ensure a minimum return of 60 percent given our $53 entry point.
  • Finally, with our GOOGL shares, we’re stepping the stop loss up to $900 from $800, which will give us a minimum return of just over 22 percent in the shares.

One last item of note, during the past week our position in AMN Healthcare (AMN) was stopped out when the shares crossed below our $37 stop loss level leaving us with a modest profit. Despite that happening, the drivers that led us to initially add the shares to the Tematica Select List – the intersection of the current nursing shortage and the demand for healthcare workers that is a part of our Aging of the Population investing theme – remain intact. As such, we’ll add AMN shares to the Tematica Contender List while we look for a favorable re-entry price.

 Updates Updates Updates

Below are some happenings for those companies on the Tematica Select List that we found noteworthy over the last week. As 1Q 2017 earnings season finally begins to die down, we expect to resume our quest to find new positions for the Select List or at least the thematic bullpen that we affection call the Tematica Contenders List. Two companies that I’m starting to roll my sleeves up on include MGM Resorts International (MGM) as part of our Guilty Pleasure investing theme and CSX (CSX), which falls under our Economic Acceleration/ Deceleration investing theme.

Alphabet (GOOGL), Asset-lite Business Models

GOOGL shares were largely unchanged this past week on the heels of its annual Google I/O event. There were several notable announcements there, including new hardware and augmented reality (AR) developments, as well as the news that Google Home will be available in more countries outside the U.S. over the coming months.

Earlier in the week Alphabet announced its Waymo division would team up with Lyft to commercialize its driverless technology, which increases the potential for Waymo to go from investment mode to perhaps revenue generating over the next several quarters. Should that happen, Alphabet could either redeploy those investments to other projects and if not we could see a reason to contemplate upside to EPS in 2019-2020.

Getting back to the here and now or at least the nearer term, we continue to see Alphabet as extremely well positioned for the continued acceleration in our increasingly connected society toward digital search (desktop and mobile), advertising dollars shifting to digital platforms (Google, YouTube) and consumer appetite for streaming content. At the same time, the company continues to exhibit a more focused view on delivering profits, something we appreciate as shareholders.

  • Our price target is $1,050, which offers roughly 8% upside from current levels.
  • Even as GOOGL shares approach our target, much like we say with Amazon (AMZN) shares, GOOGL shares are ones to own, not trade.

 

 

Applied Materials (AMAT), Disruptive Technology

Last week Applied Materials (AMAT) reported better-than- expected earnings on in-line revenue due primarily to robust margin expansion versus year-ago levels. Furthermore, given prospects for continued margin improvement and underlying order strength, the company guided the current quarter above consensus expectations. Per the quarterly report, Semiconductor Systems sales rose more than 50 percent year over year, benefiting from the ongoing digitization that has chips becoming the new “fabric” of lives — Connected Car, Connected Home, the Internet of Things (IoT) and wearables. Applied is also benefiting from rising semiconductor capacity in China as well as strong demand for organic light emitting diode displays that led its display equipment sales to spike more than 100 percent in the quarter.

  • On the underlying strength in the current demand up-cycle and prospects for further margin improvement, we are boosting our price target to $55 from $47, which offers upside of 22 percent from current levels.
  • We continue to rate AMAT shares a Buy

 

 

Universal Display (OLED), Disruptive Technology

You probably noticed in our Applied Materials comments earlier that one of the drivers to its strong quarter was robust demand from the currently capacity constrained organic light emitting diode market, or OLED’s for short and not to be confused with Universal Display’s ticker symbol, which is also OLED. If you didn’t feel free to scroll back up and re-read them.

During AMAT’s earnings conference call, the management team gave a rather bullish endorsement for our position in OLED shares when it said, “we see investment in mobile OLED getting stronger as confidence in the adoption rates of OLED technology increases. Recent forecasts indicate that two-thirds of new smartphones could have OLED displays by 2021 and screen manufacturers are accelerating their investment plans accordingly.”

With more applications — ranging from smartphones to TVs and wearables — embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal’s chemicals and licensing business looks very bright.

  • We are reassessing our current $125 price target with an upward bias.

 

 

Dycom Corp. (DY), Connected Society

This morning, our shares of Dycom Corp. (DY) are getting hard hit following the company’s mixed quarterly earnings report. The good news is for the April quarter, Dycom crushed expectations with $1.30 per share in earnings on revenue of $786.3 million compared to consensus expectations of $1.19 and $736.2 million, respectively. Organic revenue nearly 15 percent year on year, while business acquired in the last year contributed $23 million. While details in the pre-earnings conference call press release were scant, we see the year over year growth speaking to the continued build out of next generation networks at core customers like Verizon (VZ), Comcast (CMCSA) and our own AT&T (T).

Now for the less than good news that is pressuring the DY shares  – the company’s outlook for the current quarter. Dycom is forecasting contract revenue to be in the range of $780-$810 with EPS between $1.35-$1.50, which falls short of consensus expectations that were looking for revenue $845-$850 million with EPS in the range of $1.76-$1.79. As we suspected, the culprit given the nature of the company’s business is the timing of projects, and in this case, the mild winter led to some pull forward, hence the part of the better than expected April quarter revenue. The other driver for the April quarter revenue beat was one industry participant has begun to invest in the wireline infrastructure required to enable fully converged wireless-wireline networks. As we’ve seen before, this tends to result in copy-cat spending by competitors, which in our view bodes well for Dycom in the coming quarters.

Stepping back, we see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet need the near unquenchable demand for data. On this morning’s earnings call, Dycom shared that it is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. While this has helped temper near-term spending expectations, the company is continuing to win contracts as customers continue to improve their network capabilities and performance. This brings us back to timing, and that means keeps tabs on Dycom’s customer base and respective network capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We expect the Wall Street community will trim back near-term revenue expectations, but given the 18 percent drop in DY shares this morning, we would argue those cuts are largely factored into the stock price.

Keeping one eye on the medium to longer-term view as these networks get built out over the next few years (not quarters), we’re inclined to use the pullback in the shares to round out the portfolio’s position size as the shares settle down provided our suspicion over the guidance miss is on point.

  • Given the initial purchase prices on the Tematica Select List at $72.89 and $80.47, we’re going to be patient with this position.
  • For those subscribers that missed the initial run in DY shares, we see this as an excellent jumping on point.

 

 

Facebook (FB), Connected Society

In the last few days, Facebook (FB) was fined by the European Commission just over $100 million on its acquisition of WhatsApp. That’s nothing to sneeze at, but there was far bigger news concerning the social media giant this week.

First, Facebook is expanding its video offering, inking a deal to broadcast a live Major League Baseball game each Friday for the rest of the season. All in all, that’s a 20-game package that begins tonight.

Second, Facebook’s “Order Food” option on both the web and mobile is now in beta testing. This initiative is an expansion of a deal from late last year with Delivery.com and Slice in which users could place orders with supported restaurants from their own Facebook pages. In our view, this speaks to the monetization across Facebook’s multi-platform offering that is benefiting from ongoing feature upgrades.

In the coming months, we’ll look to see if the slowdown in digital advertising, cited on Facebook’s earnings call, is occurring or if the shift to mobile advertising continues to be robust.

  • Our price target remains $160.
  • For now, we would suggest subscribers look to add to FB positions below $145.

 

 

USA Technologies (USAT), Cashless Consumption

Last week, USAT shares rose more than 2 percent during a quiet news week for the company. Despite the relative silence, comments from Alphabet (GOOGL) at its annual I/O developer conference revealed Android Pay was expanding into new markets: Brazil, Canada, Russia, Spain, and Taiwan. As mobile payments expand across the globe, much the way credit and debit cards have, we see an expanding target market for USA’s payment solutions.

  • We intend to be patient investors and hold USAT shares as mobile-payment adoption grows.
  • Our price target remains $6 and the shares are a Buy at current levels.

 

 

 

 

 

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

In this Week’s Issue:

  • Checking the data, the economic data that is
  • WannaCry makes HACK shares jump for joy
  • Disney (DIS) held movie hostage?
  • Alphabet (GOOGL) and Lyft team to commercialize self-driving cars
  • Amazon’s (AMZN) at it again, this time with furniture
  • Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

 

It’s been a much welcomed slower week of economic data and corporate earnings, but Mother Nature sensing we might like the lull after the last few weeks, many across the globe had to contend with the WannaCry ransom ware cyber attack – more on that below and what it means for our Safety & Securityinvestment theme position in PureFunds ISE Cyber Security ETF (HACK) shares. We’ve also got a number of updates to share, so away we go…

 

Checking the data, the economic data that is

Before we dish on WannaCry, let’s recap the economic data received this week, which included the May reading on manufacturing under the purview of the NY Fed, as well as April data for Housing Starts and Industrial Production. Let’s start with the good news, which was manufacturing activity per the April Industrial Production report ticked higher month over month, but even though this took a bite out of excess manufacturing capacity, manufacturing capacity remains underutilized. Moving over the April Housing Starts, single-family homes were flat month over month, while multifamily units fell more than 9 percent compared to March.

 

On the back of that data, the Atlanta Fed boosted its 2Q 2017 GDP reading to 4.1 percent from the prior 3.6 percent reading. Then we received the Empire Manufacturing Index for May, which clocked in at -1.0, well below the expected 7.5 reading and down compared to April’s 5.2 showing. Not exactly supportive of the Atlanta Fed’s revised forecast, and candidly more in line with the slowing evidenced in the majority of the economic data.

 

 

Tomorrow (Thursday), we’ll get the Philly Fed Index and we’ll be matching the May figure against 22.0 in April and consensus forecast of 18.5 for May. As we digest that data point, we’ll be looking for the next 2Q 2017 GDP update from the NY Fed and its Nowcasting model. As a reminder the most recent Nowcasting reading pegged 2Q 2017 GDP at 1.9 percent, down from 2.9 percent at the end of March.
 

WannaCry makes HACK shares jump for joy

Over the last five days, shares of the PureFunds ISE Cyber Security ETF (HACK)rose more than 2 percent bringing the position return to more than 6 percent since being added to the Tematica Select List in early February. As we saw over the last few days, we are seeing a pronounced pick-up in cyber attacks, which include WannaCry and the more than 300,000 computers across over 150 countries that it violated as well as other attacks on hospitals and even clothing retailer Brooks Brothers.

From time to time, we tend to settle in following a headline-worthy cyber attack and complacency returns. We’ve seen this several times, and it tends to result in a demand spike for cyber security stocks, only to see them level off over the coming months. By comparison, we continue to see a growing frequency of cyber attacks both large, medium and small, which is fueling demand and driving revenue for cyber security companies. If one were to postulate, this demand is one downside to our Connected Society investing theme. We would agree, as one company’s tailwind can be another’s headwind, and that pain point can create an opportunity for others. Pretty much what we see here, and it keeps us bullish on HACK shares given our $35 price target.

We’ll be doing a deeper dive on this week’s Cocktail Investing Podcast when Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talk with Yong-Gon (“Young Gun”) Chon, the CEO of Focal Point Data — consulting firm that advises CEOs and Boards on cyber risk.  Be sure the check the website for when the podcast is posted, or subscribe on iTunes to automatically receive each and every episode. While the Cocktail Investing podcast is free – it is, unfortunately, a “BYOB” event.

 

 

Disney (DIS) held movie hostage?

During a town hall meeting with employees, Bob Iger CEO of The Walt Disney Co (DIS) shared “hackers have claimed to have stolen a movie and are threatening to release it in segments until their demands, which include a pirate-like ransom paid with Bitcoin, are met.” While Iger did not identify the would-be stolen film, chatter suggests it to be the new “Pirates of the Caribbean” sequel, which is set to open on May 26. This is the latest film in a franchise that has grossed grossing nearly $3.73 billion worldwide. Disney is currently working with federal authorities to investigate the attack, and we’ll continue to monitor developments and what they may means for the company’s film business in the near-term.

  • The recent post-earnings pullback offers 16 percent upside to our $125 price target at current levels.
  • With a robust movie slate, declining capital spending and a super-sized $10 billion buyback program, we continue to favor the House of Mouse.

 

 

Alphabet (GOOGL) and Lyft team to commercialize self-driving cars

Amid its skirmish with Uber over self-driving technology that it is developing at Waymo, this week Alphabet’s (GOOGL) partnership with ride-hailing startup Lyft took a new turn as they agreed to work together to develop products and technology for autonomous autos. While terms and other details of the arrangement were not disclosed, there are several thoughts on what this could mean for Alphabet’s Waymo. The most obvious of which is a path to commercialization. Even Warren Buffett commented on the threat that driverless cars and trucks pose to several of Berkshire Hathaway’s businesses at the annual shareholder meeting this year, couching his remarks with “at some point.”

As we see it, the arrangement with Lyft has the potential to bring Waymo’s driverless technology to commercialization as it leverages Lyft’s network of taxis operating in more than 300 cities across the United States. What’s Lyft’s motivation in this? Reducing its largest cost, which are the drivers that get as much as 80 percent of fares, not to mention cash subsidies to retain those drivers. With other companies ranging from Apple (AAPL) to Mobileye (MBLY)vying for a slot in the driverless car market, we’ll continue to watch developments.

  • Our price target on GOOGL shares remains $1,050, which offers just under 10 percent upside from current levels.
  • With the market trading at stretched valuations, we would hold off adding to GOOGL positions at current levels.
  • That said, GOOGL shares are ones to own as we move deeper into the Connected Society.

 

 

Amazon’s (AMZN) at it again, this time with furniture

Turning to Amazon, there were two announcements that caught our eye – the first deals with Amazon’s expanding into furniture, while the other is the dismal brick & mortar retail landscapes. We commented on the later in last week’s Roundup, but we’re seeing reminders of retail-megaddon this week in TJX Companies (TJX) dismal earnings report. Our view remains Amazon is net share gainer as it expands its product and geographic footprint. That brings us back to our first point, the expansion of its furniture offering. While Amazon has sold furniture online for years, much like apparel, it is it stepping up its game as it offers a wider variety of selection — Ashley Furniture sofas and chairs and Jonathan Adler home decor. What Amazon is looking to do is tap into the growth prospects for online furniture sales, which eMarketer sees growing to more than $55 billion by 2020, up from $36 billion this year.

  • Our AMZN price target remains $1,100, which offers just under 14 percent upside from current levels. As with GOOGL shares.
  • AMZN shares are one to buy and hold, and that’s exactly what we aim to do.

 

 

Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

Applied Materials (AMAT) will report its quarterly earnings after Thursday’s (May 18) market close. Heading into the weekend consensus expectations call for the company to deliver EPS of $0.76 on revenue of $3.54 billion. As we digest the company’s earnings, we’ll be focusing on bookings and backlog with an eye for potential upside to our price target. With that report, we’ll get another take on ramping OLED industry demand. All signs point to rising capacity, and we’ll be listening to Applied’s comments not only for incremental capacity additions but the timing for those new facilities going from beta to commercial production. With more applications ranging from smartphones to TVs and wearables embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal Display’s (OLED)chemicals and licensing business looks very bright.

We’d note the price moves in these two shares have been strong, and both have continued to encroach on our respective price targets. While we anticipate an upbeat quarter and outlook from Applied, we also think expectations are running high into the earnings report. In our view, to justify the Buy ratings on both stocks, we would need to see upside to $52 for AMAT shares and near $135 for OLED shares, respectively, from current levels. We’ll dial into AMAT’s quarterly report and make our next move based on those findings. With OLED shares, we suspect we’re likely to see a series of rising price targets over the coming months as we wait for the initial sales data on Apple’s next iPhone. Odds are Apple will once again under-produce relative to demand, resulting in the headlines touting yet again another new iPhone selling out. Up over 120 percent as of last evening’s close, we will continue to hang onto our OLED shares for the ride that is to come.

 

 

 

 

 

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

In this Week’s Issue:

  • Disney Delivers an EPS Beat, But Reaffirms 2017 is a “Transitional” Year
  • Amplify Snacks Serves Up a Healthy Quarter
  • USA Technologies: Riding the Cashless Consumption Wave
  • March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

 

As we noted in the Monday Morning Kickoff a few days ago, this week was going to be yet another barn burner in terms of activity, with yet another 1,000 companies reporting earnings. We’ve gotten some incremental economic data points, but the main ones for the week – the April reports for PPI, CPI and Retail Sales – all come later in the week.

As we sifted through hundreds of earnings reports over the last two days, we also saw further downward revisions by both the Atlanta Fed and the New York Fed for their respective 2Q 2017 GDP forecasts. Hardly surprising, given the readings from ISM and Markit Economics as well as the April data supplied by regional Fed banks, but once again here we are. What made headlines yesterday was the comments from Commerce Secretary Wilbur Ross that the US economy “won’t achieve the Trump administration’s 3 percent growth goal this year and not until all of its tax, regulatory, trade and energy policies are fully in place.”

Given Ross’s comments that the growth target “ultimately could be achieved in the year after all of President Donald Trump’s business-friendly policies are implemented” but that “delays were possible if the push for tax cuts was slowed down in Congress,” odds are there is some DC-style politicking going on. Even so, the reality is without a jolt to the system odds are the US economy will remain in low gear.

As we’ve shared previously, the economy is facing several headwinds associated with our Aging of the Population and Cash-strapped Consumer investing themes that are likely to keep it’s growth range bound. As such, we continue to see current GDP expectations as somewhat aggressive for the coming quarters, and the same holds true for S&P 500 earnings expectations. That said, we are not buyers of the stock market, but rather those companies that are well suited to capitalize on the tailwinds associated with our investing themes. You’ll see confirmation of that in our comments below on Disney (DIS), Amplify Snacks (BETR), USA Technologies (USAT) and AMN Healthcare (AMN), as well as Amazon (AMZN) and Alphabet (GOOGL) in the next paragraph.

As a quick reminder, later this week we’ll get the April Retail Sales Report, which could see favorable comparisons year over year given the late Easter holiday. As usual, we’ll be digging in below the headlines to get a better sense of consumer spending for not only what they are buying, but where. We once again suspect the report will confirm the accelerating shift toward digital commerce that is power our Amazon (AMZN) and Alphabet (GOOGL) shares. We continue to rate both Buy with $1,100 and $1,050 price targets, respectively.

Now let’s dig into the earnings reports for several positions on the Tematica Select List…

 

 

 

Disney delivers an EPS beat, but reaffirms 2017 is a “transitional” year.

Last night Disney (DIS) reported March 2017 results, which included better than expected EPS, revenue that came in a tad shy of expectations and sober forward guidance, which reminded investors that 2017 is a transitional year for the company as it targets better growth in 2018. EPS for the quarter came in at $1.50, $0.09 ahead of consensus expectations as revenue rose 2.8 percent compared to the year-ago quarter hitting $13.34 billion, shy of the $13.44 billion that was expected.

Heading into 2017, we noted the first half of the year would likely be a more subdued one and so far that is proving to be exactly the case. As we enter the company’s fiscal second half of 2017, Disney has a far stronger movie lineup, which should continue into 2018 and beyond. Higher costs at ESPN and investments in new park attractions, however, are likely to be gating factors over the next few quarters. We see Disney as investing today to leverage its vast array of characters and tentpole films that will drive incremental business at its parks, for its merchandise and other businesses in the coming quarters.

Our price target remains $125, but we’ll continue to revisit that target based on box office strength in the coming months. Odds are the quarter’s results will take some of the wind out of Disney’s sails, but with the company set to continue to leverage its Content is King strategies, we’re inclined to be patient.

Breaking down the company’s segment results from the March quarter we find:

  • Cable Networks revenues for the quarter increased 3 percent to $4.1 billion and operating income decreased 3 percent to $1.8 billion. The decrease in operating income was due to a decrease at ESPN due to higher programming costs because of the timing between College Football Playoff (CFP) bowl games and NBA programming, which was partially offset by increases at the Disney Channels and Freeform. Programming costs are expected to be 8 percent higher this year due in part to the new NBA contract.
  • On a positive note, Disney continues to make progress in transitioning ESPN by expanding its reach into streaming services like those from Sling TV, Sony’s (SNE) PlayStation Vue, YouTube TV (GOOGL), Hulu and DirecTV Now from AT&T (T). While Disney is seeing favorable momentum, it’s still not enough to totally offset the slide it is seeing in cable subscriptions. As we discussed recent, Disney is focusing on live mobile content, which should help drive incremental viewing compared to the 23 million unique users who collectively spent 5.2 billion minutes engaging with ESPN on its mobile platforms in the March quarter.
  • Parks and Resorts revenues for the quarter increased 9 percent to $4.3 billion and segment operating income increased 20 percent to $750 million. We’d note that segment benefited from price increases taken in prior months, but this was offset by the later than usual Easter holiday this year.
  • As expected construction is underway on Star Wars attractions at both Disney World and Disney Land, a great example of how the company’s film content will drive park attendance and merchandise sales. Management commented that in a few days the 10 millionth guest will pass through Shanghai Disney and the park is tracking to break even this year as Disney downshifts investing in the park compared to year-ago levels.
  • Studio Entertainment revenues for the quarter decreased 1 percent to $2.0 billion and segment operating income increased 21 percent to $656 million. Despite having two films that grossed more than $1 billion each during the quarter – Rouge One from the Star Wars franchise and remake of Beauty and the Beast – the quarter faced stiff year over year comparisons given the success of last year’s Star Wars: The Force Awakens and Zootopia and in essence making them a victim of their own success. On the earnings call, as expected management talked up Friday’s Guardians of the Galaxy 2 release, which took the top spot at the box office and raked in more than two times the first installment of the Guardians franchise. Disney reminded investors it has four Marvel films coming over the next 14 months, as well as the next installment of the Pirates of the Caribbean franchise and Cars 2 dropping in the next few months before The Last Jedi lands in December. Longer-term, there will be more Marvel, Pixar and Lucasfilm tentpole properties, but on the call Disney shared that Frozen 2 will be released in 2019.
  • Broadcasting revenues for the quarter increased 3 percent to $1.9 billion and operating income increased 14% to $344 million led by greater sales of Marvel TV programming content to Netflix (NFLX) and others.
  • Consumer Products & Interactive Media revenues for the quarter decreased 11% to $1.1 billion and segment operating income increased 3 percent to $367 million.

On the housekeeping front, during the March quarter, Disney repurchased about 18.6 million shares for about $2 billion. Over the last two quarters (better known as the company’s fiscal year-to-date), its repurchased 41.5 million shares for approximately $4.4 billion. Citing lower than expected capital spending needs and improved operating cash flow, Disney once again increased its share repurchase target by $2 billion to $9 billion to $10 billion for the year. As the company chews through this program, it should help improve year over year EPS comparisons, but we’ll still be monitoring both operating profit as well as net income growth when contemplating how to best value the shares.

The bottom line on DIS shares:

  • Given the appreciation in the shares price over the last five months, we would not add to positions in the Walt Disney Co (DIS) at current levels and thus are changing our rating to a Hold at this point in time.
  • Rather, we would look to commit fresh capital to DIS shares between $100-$105 if the shares pull back in the coming days, while over the longer term we still maintain a price target of $125 for the shares.

 

 

Amplify Snacks Serves Up a Healthy Quarter

After last night’s market close, Foods with Integrity theme company Amplify Snacks (BETR) reported 1Q 2017 results that included EPS of $0.06 vs. the expected $0.06 on revenue of $87.2 million vs. the consensus expectation of $87.6 million and up more than 60% compared to $54.3 million in the year-ago quarter. The one wrinkle in the quarter was the company’s gross margin line that contracted year over year, which we attribute to short-term initiatives to grow the company’s business further. For example, during the quarter the company launched its SkinnyPop Ready-to-Eat popcorn in the U.K., carried a full quarter of both the Oatmega and Tyreell acquisitions, and introduced new SkinnyPop product extensions (popcorn cakes, popcorn mini-cakes and microwave popcorn).

As these initiatives bear fruit over the coming months and longer term as Amplify brings Tyrrell chip products to the US in the back half of 2017 and 2018, the good news is the company continues to expand its distribution. Exiting the quarter, its ACV (a widely recognized distribution measure) hit 81 points up from 73 in the same period last year. The year over year improvement reflects new distribution across grocery, mass and convenience channels as those companies embrace our Foods with Integrity investing theme and expand their healthy snacking alternatives.

Given stronger prospects for the domestic business, Amplify amended its tax guidance which has led to a modestly higher tax rate than previously expected. This, in turn, has led the company to ever so so slightly trim its 2017 EPS outlook to $0.42-0.50 versus our prior expectation of $0.43-0.51., which in our view is a very minor change relative to the growth prospects to be had over the coming quarters.

  • Exiting the company’s quarterly earnings report, we continue to rate BETR shares a Buy with a $10.50 price target.

 

  

USA Technologies: Riding the Cashless Consumption Wave

Yesterday, USA Technologies (USAT) reported inline EPS expectations for the March quarter on better than expected revenue. USA Technologies 1Q 2017 revenue rose 30 percent year over year as the company continued to grow the number of connected to its ePort services, up 26 percent to 504,000 connections. As the adoption of mobile payments continues to spread, USA expanded its customer base by another 500 to reach 12,400 exiting the quarter, a 15 percent increase year over year. The company also issued a more upbeat outlook calling for 2017 revenue of $95-$100 million, a tad higher than the $95-$97 consensus expectation derived from the three Wall Street analysts following the shares.

On the earnings call, the company shared a number of confirming data points for investment thesis on USAT shares including:

  • USAT is working with Ingenico to provide customers with more hardware options and where Ingenico will be able to leverage USA’s quick connect service as well as ePort Connect platform for use with its NFC/contactless unattended payment solutions. As way of background, Ingenico was the first international multi-billion-dollar mainstream payments hardware company that have entered the unattended retail market.
  • During the quarter, USA also launched an alliance with vending company Gimme Vending as also announced a stand-alone loyalty program that integrates with Apple’s (AAPL) Apple Pay.
  • Digging into 1Q 2017 revenue, the company had 105 million total transactions representing 203 million in transaction volume increases of 28% and 34% respectively from last year.
  • License and transaction fees rose 19% year over year to $17.5 million compared to $14.7 million last year. We call this out because the segment includes recurring monthly service as well as transaction processing fees, which offer good visibility and predictability. As the percentage revenue derived from license and transaction continues to climb from 66% of total revenue in 1Q 2017, the company’s visibility should similarly improve.

With the continued migration toward a cashless society, we continue to rate USAT shares a Buy with a $6.00 price target.

 

 

March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

Yesterday we received the March Job Openings and Labor Turnover Survey and once again it showed not only a strong year over year increase in healthcare job openings, but also the number of open healthcare jobs significantly outweighs the number of positions filled. Granted the data lags by a month, but given the April jobs data, we rather doubt there has been any meaningful change in the metrics over the last month. We continue to see the far greater number of healthcare job openings compared to the available talent pool as driving demand for AMN Healthcare’s (AMN) healthcare workforce solutions.

  • With more than 20% upside to our $47 price target, we continue to rate AMN shares a Buy.

 

 

 

 

 

 

 

 

 

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

In this Week’s Issue:

  • Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings
  • Intel’s Capital Spending Bodes Well For Applied Materials
  • Facebook Earnings Due After Today’s Market Close
  • Universal Display and AMN Healthcare Earnings On Tap for Thursday

 

As we noted in our Monday Morning Kickoff out just a few days ago, this week is by far one of the busiest with more than 1,000 companies reporting, a slew of economic data and the Fed’s latest FOMC meeting. The Fed meeting culminates today at 2 PM ET, and soon thereafter we’ll learn if the Fed has once again boosted interest rates. As we have been pointing out here at Tematica in an almost broken drum-like fashion, the domestic economy cooled rather dramatically during 1Q 2017, with GDP clocking in around 0.7 percent vs. 2.1 percent in 4Q 2016.

While that is in the rear view mirror, the initial data for 2Q 2017 found in the April data from ISM Manufacturing, Markit Economics and several regional Fed indices all point to a continuation of that slow speed. That compares to the current consensus expectation that has GDP clocking in at 2.8 percent according to The Wall Street Journal’s Economic Forecasting Survey. At least, for now, that view looks rather aggressive and with inflation data rolling over as year over year comparisons ease, it looks to us like the Fed is likely to stand pat on interest rates later today. Of course, there will be the usual slicing and dicing of the Fed policy statement to get a better sense if the Fed will look to boost rates at its next meeting in June or in the back half of this year. As a reminder, coming into 2017 the Fed shared that it was looking to boost rates three times. Following one hike already earlier this year, the growing question could very well be will they get around to all three?

Turning to the Tematica Select List, we’ve seen a number of strong moves over the last week as we’ve journeyed through 1Q 2017 earnings season. Examples include our Amazon (AMZN), Alphabet (GOOGL) and PowerShares Exchange-Traded Fund Trust (PNQI) shares, but we’ve still yet to hear from a number of Select List companies. Luckily (yes that was sarcasm), we’ve got several reporting later this week, including Facebook (FB) after today’s close, followed by Universal Display (OLED) and AMN Healthcare (AMN) tomorrow night. In the coming paragraphs, we’ve set the table for what is expected from these companies and we also share our price target updates for Amazon and Alphabet, which even after their respective moves over the last week still keeps the shares in the Buy zone.

In case you were afraid the earnings fun would be over soon, that’s certainly not the case as we have several others Select List companies, including The Walt Disney Co. (DIS) and International Flavors & Fragrances (IFF) reporting next week. Don’t worry, we’ll be here to guide you through it, using our thematic lens to lead the way.

 

Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings

Last week, Amazon reported blowout earnings of $1.48 per share for the first quarter, well ahead of the $1.10 consensus expectation for the quarter. Revenue for the quarter rose 23 percent, year over year, to $35.71 billion, ahead of the $35.31 billion consensus number with double-digit improvement across all three businesses — North America, 23.5%; International, 15.6%; and Amazon Web Services (AWS), 42.7%. The revenue beat, alongside better-than-expected operating income of $1 billion vs. the $900 million consensus and Amazon’s own guidance for the quarter of $250 million-$900 million, led to the positive earnings surprise.

Sifting through the segment results, AWS continues to be the key profit generator for the company as it delivered the vast majority of the company’s overall operating profit, with operating losses at International offsetting profits in North America. As impressive as that was, we’d note that despite the segment’s revenue growth, its operating margin only improved to 24.3 percent in 1Q 2017 vs. 23.5 percent in the year-ago quarter. Once again Amazon offered forward guidance that one could drive a truck through, but even though it was not specifically shared, we find there is a growing comfort following the quarter that Amazon can deliver profits even as it continues to expand its footprint.

From our perspective, Amazon is riding the pole position of not only our Connected Society investing theme, but increasingly our Content is King, Cashless Consumption, and Asset-Lite Business Model as well. Talk about the power of four thematic tailwinds… as we have said before, Amazon is a stock to own and we see no signs of that changing anytime soon.

Also last week, Asset-Lite Business Model company  Alphabet (GOOGL) delivered knockout earnings and revenue despite concerns for advertising weakness at YouTube. For the March quarter, Alphabet delivered an impressive EPS of $7.73, $0.35 ahead of consensus expectations as revenue for the quarter rose more than 22 percent year over year to 424.75 billion. Without question Alphabet’s business – Search, Advertising and YouTube — are all benefitting by the shift to mobile from the desktop; launches thus far of the company’s TV streaming service, YouTube TV have been favorable and demand for its cloud business, much like that at Amazon, remains strong.

As we have shared for some time, we see no abatement in the tailwinds that are driving the two business, which includes the migration to online shopping, cloud adoption, streaming content and migration of advertising dollars to digital platforms. If anything, we continue to see prospects for those winds to blow even harder as the two companies continue to position themselves better than well for our increasingly connected society.

Those winds, along with solid execution and a focus on profits at both companies, are behind our revised price targets for both companies:

  • Our new price target on Amazon (AMZN) shares is $1,100, up from the prior $975, which offers just over 17 percent upside and keeps our Buy rating intact.
  • Our new price target for Alphabet (GOOGL) shares is $1,050, up from $975, and that equates to roughly 12 percent upside, which also keeps our Buy rating intact.

 

Intel’s Capital Spending Bodes Well For Applied Materials

Also last week, Intel (INTC) reported its quarterly earnings and reiterated its outlook for capital spending of $12 billion this year, which would be up from $9.6 billion in 2016. While not new information, the confirmation serves as a reminder of the tailwind driving the business at Applied Materials (AMAT). We expect similar data points as earnings season progresses in light of demands not only for memory and other chips but also organic light-emitting diode capacity. with regard to the latter, we’ll look for similar comments on OLED industry display capacity constraints and expansion when Universal Display (OLED) reports earnings after tomorrow’s market close (more on that below).

  • Our price target on AMAT shares remains $47.

 

Facebook Earnings Due After Today’s Market Close

On the heels of Alphabet’s stronger- than-expected quarterly results, expectations are running for Facebook (FB), a Connected Society company that like Alphabet is benefitting from the accelerating shift to digital advertising across its various properties. Even though Facebook has a track record of beating Wall Street expectations when it reports its quarterly results, from time to time whisper expectations that are above published forecasts can get the better of a company. Given the strong quarterly results coming out of Alphabet, odds are Wall Street is expecting Facebook to deliver at least several pennies better than the consensus forecast for 1Q 2017 that calls for EPS of $1.12 on revenue of $7.83 billion. We acknowledge the strong price move year to date as well as Alphabet’s quarterly results likely mean anything other than a blowout earnings report is likely to result in the shares pulling back.

  • In our view, any post-earnings pullback is a likely opportunity for those who have missed out previously.
  • We’ve been reviewing our $150 price target, which is modestly below the $161 consensus target on the shares, and expect to update it following Facebook’s earnings report out after today’s market close. 

 

Universal Display and AMN Healthcare Earnings On Tap for Thursday

The earnings fun continues tomorrow when we have both Universal Display (OLED) and AMN Healthcare (AMN) reporting results after the market close. First, with AMN, expectations are far the healthcare workforce solutions company to deliver EPS of $0.60 on revenue of $493 million. Recent JOLTs reports have confirmed the discrepancy between healthcare workers job openings and the viable candidate pool, which bode rather well for AMN’s workforce placement business. Longer-term, the Aging of the Population and capacity constrained nursing schools are a powerful combination that provides a longer-term tailwind for AMN’s business.

  • Our price target on AMN heading into the earnings report remains $47.

Turning to Universal Display, this Disruptive Technology investment theme company is expected to deliver EPS between -$0.05 per share and $0.02 on revenue between $31.8-$36 million, vs. $29.7 million achieved in the year-ago quarter. We’d remind subscribers the key to the Universal Display’s investment narrative is the expanding number of applications for organic light emitting diode displays, including prospects for Apple’s (AAP) next iteration of the iPhone.

On last night’s earnings call for Apple, the company’s iPhone volumes missed expectations and even CEO Tim Cook called out the culprit — “rumors around future products” — that is likely pushing out the current upgrade cycle. In our view, what’s bad for Apple today is very good news for Universal Display.

On the Universal Display earnings call, we expect to get an update on industry capacity expansion plans that bode well for our Applied Materials shares, as well as one for recent expansions being switched on. Without question, there will be much chatter over new applications, the next iPhone, and rising manufacturing levels, all of which points to rising demand for Universal’s chemicals and IP licensing business.

  • We continue to rate OLED shares a Buy and heading into the earnings call our price target remains $100.

 

An NFL ‘Thursday Night Football’ Games Win Cements Amazon’s Content Plans

An NFL ‘Thursday Night Football’ Games Win Cements Amazon’s Content Plans

If there is one company that blurs the lines across several of our investment themes and their tailwinds it is Amazon (AMZN). From the accelerating shift to digital commerce and cloud that is a part of our Connected Society investing theme to Cashless Consumption and increasingly our Content is King investing themes, Amazon continues to make strides as it expands the scale and scope of its Prime offering.  The latest includes beating out Twitter (TWTR), Facebook (FB) and Google’s (GOOGL) YouTube to stream the NFL’s Thursday Night Football. We’ll see how many viewers stream these games across Amazon’s Prime Video footprint across its various TV, tablet and smartphone apps, but in our view, this goes a long way to cementing Amazon’s position in content.  

 The only thing better than one thematic tailwind pushing on a company’s business is two… so you can imagine how powerful three of them must be! Our only question is how long until Amazon expands into our Guilty Pleasure investing theme?

The NFL has a new streaming host for part of its Thursday Night Football package.Amazon will stream the 10 games broadcast by NBC and CBS next season as part of a one-year, $50 million deal, according to The Wall Street Journal and The Sports Business Journal.

The games will be available exclusively to Amazon Prime subscribers, per The Sports Business Journal.

Amazon beat out Twitter, Facebook and YouTube for the rights, according to the report. Twitter paid $10 million last season to provide live streaming services for the same number of games.

Link to Story: Reports: Amazon lands $50M deal to stream NFL ‘Thursday Night Football’ games

 

Details of this story are featured on this week’s Cocktail Investing podcast. Click below to listen: