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Quick Thoughts on Alphabet and McCormick Shares

Quick Thoughts on Alphabet and McCormick Shares

Alphabet Gets Dinged, But Is Already Responding to Advertiser Concerns

The last few days have seen a rating downgrade on Asset-lite Business Model company Alphabet (GOOGL) and its shares to Market Perform from Outperform by Bank of Montreal and a new Hold rating at Loop Capital. Despite the accelerating shift toward digital commerce and streaming content that is benefitting several of Alphabet’s businesses, the shares are caught in a push-pull over the recent snafu that placed ads next to what have been described as “offensive and extremist content on YouTube.”

We certainly understand that reputation is a key element at consumer branded companies — from restaurants to personal care products and all those in between. As we said previously, we expect there will be some blowback on Alphabet’s advertising revenue stream, and some estimates put that figure between $750 million – $1.5 billion, but the fact of the matter is that it all comes down how much time elapses before those consumer branded companies return —they will come back, they always come back to Google.

The good news is Alphabet has improved its ability to flag offending videos on YouTube and has the ability to disable ads. The company is going one step further and is introducing a new system that, “lets outside firms verify ad quality standards on its video service, while expanding its definitions of offensive content.”  These new decisions, as well as Alphabet’s stepped up action come at a crucial time, given that Newfronts (which is the time when digital ad platforms pitch their tools and inventory) starts May 1. In our view, Alphabet needs to win back advertisers’ trust and we’re hearing some advertisers that recently pulled their spending, like Johnson & Johnson (JNJ), are already reversing their decision.

The bottom line is while the recent advertising boycott is likely to cause some short-term revenue pain that is likely to be a positive for our Connected Society position in Facebook (FB) shares, the longer-term implications are likely to be positive for Alphabet as these new measures win back companies and provide assurances that their brands are safe on YouTube and other Alphabet properties.

  • While we see potential upside to our $900 price target, we would caution subscribers to wait for the advertising boycott news to be priced into the shares, something that is not likely to happen fully until Alphabet reports its quarterly earnings on April 27. 

 

 

As expected, McCormick Reaffirms Long-Term Guidance, But Its 2H 2017 That Matters

Earlier this morning, ahead of today’s investor day, Rise & Fall of the Middle-Class investment theme company McCormick & Co. (MKC) reiterated its long-term constant currency objectives calling for both annual sales growth of 4 to 6 percent and EPS growth of 9 to 11 percent. Coming off of the company’s recent quarterly earnings, this reiteration comes as little surprise. What will be far more insightful will be management laying out its agenda to cut $400 million in costs between 2016 and 2019, not to mention more details on how it aims to deliver double digits earnings growth year over year in the back half of this year following its recent quarterly earnings cadence reset.

We continue to like the company’s business, which is benefitting from shifting consumer preferences for eating at home and eating food that is good for you as well as rising disposable incomes in the emerging economy. There is little question the company is a shrewd operator that is able to drive costs savings and other synergies from acquired companies. We also like the company’s increasing dividend policy, which tends to result in a step up function in the share price.

  • With just over 12 percent upside to our $110 price target, we need greater comfort the company can deliver on earnings expectations for the second half of the year or see the shares retreat to the $95 level before rounding out the position size in the portfolio. 
  • For now, we continue to rate MKC shares a Hold.

 

 

 

More U.S. Households Now Have Netflix Than a DVR… Who Even Has a DVD Player Anymore?

More U.S. Households Now Have Netflix Than a DVR… Who Even Has a DVD Player Anymore?

The power of streaming the content you want, when you want it on the device you prefer is not to be underestimated. It’s been a sea-change in how people consume content, and that has led to a shift in the hardware that people use. With Netflix outstripping digital video recorders (DVRs), we have to question how much longer companies will manufacture those devices, which could be problematic for Tivo, a company that has already been contending with built-in DVR functionality inside digital cable set-top boxes. With Google set to unveil a TV streaming service with DVR functionality in the Cloud, it’s looking more and more like the only streaming hardware we may need will be smartphones, tablets, and smart TVs…. no good for all that cable set-top box subscription fee revenue at Comcast and others. Technology evolution…. a great tailwind for some, and a painful headwind for others.

Netflix has hit a new milestone: More U.S. television households now have the streaming service than a digital video recorder, according to a recent study.

About 54% of U.S. adults said they have Netflix in their household — while 53% have a DVR, according to Leichtman Research Group’s annual on-demand study. It’s the first time that households with Netflix (including those that use shared accounts) have surpassed the level of those with a DVR in the history of LRG’s studies. In 2011, according to the research firm, 44% of TV households had a DVR and 28% had Netflix.

Netflix has now eclipsed DVR usage despite the latter having a years-long head start. TiVo’s first digital video recorder shipped in 1999, while Netflix debuted its video-streaming service in 2007 and started the shift away from its DVD-by-mail business. As of the end of 2016, Netflix had 49.4 million streaming subscribers in the U.S., up 10.5% year over year.

Overall, 64% of respondents said they get a subscription video-on-demand service from Netflix, Amazon Prime Video, and/or Hulu.

Source: More U.S. Households Now Have Netflix Than a DVR | Variety

Voice Recognition Technology Hears Whispers of M&A

Voice Recognition Technology Hears Whispers of M&A

Earlier this month we had CES 2017 in Las Vegas, a techie’s mecca of new whiz-bang products set to hit the market, in some cases later this year, but in others in 2018 and beyond. A person tracking the CES trade shows over the years likely remembers the changes in inputs from clunky keyboards and standalone number pads to rollerball driven mice to laser based ones, which gave way to trackpads and touchscreen technology. Among the sea of announcements this year, there were a number that focused on one aspect of our Disruptive Technology investing theme that is shaping up to be the next big change in interface technology — voice recognition technology.

Over the years, there have been a number of fits and starts with voice technology dating all the way back to 1992 when Apple’s (AAPL) own “Casper” voice recognition system that then-CEO John Sculley debuted on “Good Morning America.” As the years have gone by and the technology has been further refined, we’ve seen more uses for voice recognition technology in a variety of applications and environments ranging from medical offices to interacting with a car’s infotainment system. As far back as 2004, Honda Motor’s (HMC) third generation Acura TL sported an Alpine-designed navigation system that accepted voice commands. No need to press the touchscreen while driving, just use voice commands, (at least that was the dream — but for those of us that tried to change the radio station and ended up switching the entire system over to Spanish, it wasn’t so useful!)

More recently with Siri from Apple, Cortana from Microsoft (MSFT), Google Assistant from Alphabet (GOOGL) and Alexa from Amazon (AMZN) we’ve seen voice recognition technology hit the tipping point. Each of those has come to the forefront in products such as the Amazon Echo and Google Home that house these virtual digital assistants (VDAs), but for now, one of the largest consumer-facing markets for voice interface technology has been the smartphone. Coming into 2016, market research and consulting firm Parks Associates found that nearly 40 percent of all smartphone owners use some sort of voice recognition software such as Siri or Google Now.

In 2016, the up and comer was Amazon, as sales of its Echo devices were up 9x year over year this past holiday season and “millions of Alexa devices sold worldwide this year.” If you’re a user of Amazon Echo like we are, then you know that each week more capabilities are being added to the Alexa app such as ordering a pizza from Dominos (DPZ), calling for an Uber, checking sports scores, shopping with your Amazon Prime account, hearing the local weather forecast and getting the latest news or perhaps some new cocktail recipes.

Not resting on its laurels, Amazon continues to expand Echo’s capabilities and announced that Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot. Once an order is placed, Amazon delivery partners deliver the food in one hour or less. Pretty cool so long as you have Amazon Restaurants operating in and around where you live. We’d point out that since you’re paying with your Prime account, which has a credit card on file, this also expands Amazon’s role in our Cashless Consumption investment theme as does Prime Now which lets Prime members in cities in which the service is available get deliveries in under two hours from Amazon as well as from local participating stores.

But we digress…

Virtual digital assistants cut across more than just smartphones and devices like Amazon Echo and the Google Home. According to a new report from market intelligence firm Tractica, while smartphone-based consumer VDAs are currently the best-known offerings, virtual assistant technologies are also beginning to emerge within other device types including smart watches, fitness trackers, PCs, smart home systems, and automobiles – hopefully, this time not switching us into Spanish.

We saw just that at CES 2017 with some landscape changing announcements for VDAs such as withAlphabet that had several announcements surrounding its Google Home product, including integration into upcoming Hyundai and Chrysler models; and acquiring Limes Audio, which focuses on voice communication systems, and will likely be additive to the company’s Google Home, Hangouts and other products. Microsoft also scored a win for Cortana with Nissan.

While those wins were impressive, the big VDA winner at CES was Amazon as it significantly expanded its Alexa footprint on deals with LG, Dish Network (DISH), Whirlpool (WHR), Huawei and Ford (F). In doing so Amazon has outflanked Alphabet, Microsoft and even Apple in the digital assistant market, but then who doesn’t find Siri’s utility subpar? To us, that’s another leg to the Amazon stool that offers more support to the share alongside the digital shopping/services, content, and Amazon Web Services businesses.

To be fair, Apple originally did not license out its Siri technology. It was only in June 2016 that Apple announced it would open the code behind Siri to third-party developers through an API, giving outside apps the ability to activate from Siri’s voice commands, and potentially endowing Siri with a wide range of new skills and datasets, potentially making a mistake similar to the one that originally cost Apple the Operating System market to Microsoft. Amazon, on the other hand, has been eager to bring other offerings onto its Alexa platform.

Tractica forecasts that unique active consumer VDA users will grow from 390 million in 2015 to a whopping 1.8 billion worldwide by the end of 2021 – Juaquin Phoenix’s Her is closer than you’d think!  During the same period, unique active enterprise VDA users will rise from 155 million in 2015 to 843 million by 2021.  The market intelligence firm forecasts that total VDA revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021.

In the past when we’ve seen new interface technologies come to market and move past their tipping point, we tended to see slowing demand for the older input modalities. Case in point, a new report from Technavio forecasts compound annual growth of just 3.63 percent for the global computing mouse market between 2016-2020. By comparison, Global Industry Analysts (GIA) expects the global market for multi-touch screens to reach $8 billion by 2020 up from $3.5 billion in 2013, driven by a combination of mobile computing and smart computing devices. For those who are less than fond of doing time calculations, that equates to a compound annual growth rate of 11 percent. We’d also point out that’s roughly half the expected VDA market in 2021.

One potential wrinkle in that forecast is the impact of VDAs. Per eMarketer, 31 percent of 14-17-year-olds and 23 percent of 18-34-year-olds regularly use a VDA.

Putting these two together, we could see slower growth for touch-based interfaces should VDA adoption take off. Looking at the recent wins by Amazon and Google, factoring in that Apple and Comcast (CMCSA) are favoring voice technology in Apple TV and XFINITY TV and growth in the smartphone market is stalling, there is reason to think the GIA forecast could be a tad robust, especially in the outer years.

Turning our investing gaze to companies that could be vulnerable should the GIA forecast prove to be somewhat aggressive, we find Synaptics (SYNA), whose tag line is “advancing the human interface,” and the “human machine interface” company that is Alps. Both of these companies compete in the smartphone, wearables, smart home, access control, automotive and healthcare markets — the very same markets that are ripe for voice technology adoption.

From a strategic and thematic perspective, one could see the logic in Synaptics and Alps looking to shore up their market position and customer base by expanding their technology offering to include voice interface. Given the head start by Apple, Alphabet, Microsoft, and Facebook, while Synaptics and Alps could toil away on “made here” voice technology efforts, the time-to-market constraints would make acquiring a voice technology company far more practical.

Here’s the thing, we’ve already seen Alphabet acquire Limes Audio to improve its voice recognition capabilities. As anyone who has used Apple’s Siri knows, it’s far from perfect in voice recognition and voice to text. In our view, this means larger players could be sniffing around voice technology companies in the hopes of making their VDAs even smarter.

In many respects we’ve seen this before whenever a new disruptive technology takes hold alongside a new market opportunity — it pretty much resembles a game of M&A musical chairs as companies look to improve their competitive position. In our view, this means companies like Nuance Communications (NUAN), VoiceBox, SoundHound, and MindMeld among other voice technology companies could be in high demand.

Disclosure: Nuance Communications (NUAN) shares are on the Tematica Select List. Both Nuance Communications and Synaptics, Inc. (SYNA) reside in Tematica’s Thematic Index.

Alibaba to invest big time in entertainment taking on Netflix and Amazon

Alibaba to invest big time in entertainment taking on Netflix and Amazon

2016 was a year of marked investment in content from the likes of Netflix, Amazon and Alphabet. But there are more companies entering the fray including Facebook and even Apple. Given the global thirst for content, which both Amazon and Netflix are aiming to cater to, it comes as little surprise that Alibaba is looking to invest in Content, which we all know is King. If there is any question about that, we’d point you to the US box office and Rogue One: A Star Wars Story.

Alibaba Digital Media and Entertainment Group, the entertainment affiliate of Alibaba, plans to invest more than 50 billion yuan ($7.2 billion) over the next three years, the affiliate’s chief executive said.

In an internal email seen by Reuters and confirmed by an Alibaba group spokeswoman, the affiliate’s new CEO Yu Yongfu pledged to invest in content, saying “he didn’t come to play.”

Alibaba’s entertainment business underwent a major reorganisation in October, marking a total consolidation of the company’s media assets.

Source: Alibaba entertainment affiliate to invest over $7 billion over next 3 years

World Trade Center Teams With Tribeca Enterprises For Virtual Reality Arcade 

World Trade Center Teams With Tribeca Enterprises For Virtual Reality Arcade 

November will showcase virtual reality technology, the next potentially disruptive technology to how people consume content. With VR headsets available from Google, Facebook, Samsung and HTC among others at a growing number of retail locations ranging from Target to Macy’s and Amazon, the showcase is likely to stoke interest this holiday shopping season. The secret sauce for more widespread adoption will be more VR content and headsets at more affordable prices. We expect that to happen over the coming quarters.

“Blurring the boundaries between reality, fantasy, and the future of cinema, Westfield’s new landmark destination in Lower Manhattan to give visitors the opportunity to watch — at no charge — mind-blowing VR programming created by directors of Antz and Madagascar, The Bourne Identity, and from Cirque du Soleil”

In partnership with the premier curators of VR, Tribeca Enterprises, the Tribeca Virtual Reality Arcade at Westfield World Trade Center will, over three weekends in November, present four VR selections that represent the very best of cutting-edge narrative storytelling from the medium’s most innovative content creators.  The experiences will be screened on viewing devices that allow visitors to experience film as a 360° total immersive experience instead of on the traditional two-dimensional movie screen.

Source: Westfield World Trade Center Teams With Tribeca Enterprises To Host Tribeca Virtual Reality Arcade | Virtual Reality & Augmented Reality Trend News & Reviews – Virtual Reality Reporter