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Fortnite is the harbinger of more pain for the already struggling toy industry

While it is rather clear to us why Toys R Us is filing bankruptcy and even Star Wars themed toy sales weren’t enough to help Mattel (MAT) this past holiday season, in-app purchases for the new iOS version of Fortnite are rather revealing. The recently launched gaming app, which sits at the center of our Connected Society and Content is King investing themes, typifies the shift toward gaming, and mobile gaming, in particular, that has changed the kinds of toys that children of all ages play with.

At Tematica we like to say confirming data points for our investment themes are all around us in everyday life. In this case, all one has to do is look at the kinds of “toys” being used by children, tweens and teens as well as some adult – smartphones and in some cases tablets to play games, read or even stream movies and TVs. With a nearly endless choice of games, books and video content, one has to wonder how long traditional toys, such as action figures and dolls, can survive? Perhaps they will in a limited form that powers licensable content to gaming and content producers much the way the struggling comic industry is being utilized at the movie box office.

That would mean companies like Mattel and Hasbro (HAS) understand what it takes to pivot and capture the benefits of our Asset-lite Business Model investing theme.

 

Though it launched on iOS as a limited “early release” last Thursday, Epic Games’ Fortnite is already sitting atop the App Store’s free app download charts and, according to fresh estimates from Sensor Tower, has grossed more than $1.5 million in worldwide in-app purchases.

Players spend real money to buy V-Bucks, which can be redeemed for skins, accessory modifications, character animations and more. Currently, V-Buck packs range from $9.99 for 1,000 currency units to $99.99 for 10,000 units. Larger purchases net additional in-game currency, for example the $99.99 tier comes with an extra 3,500 V-Bucks on top of the standard 10,000 units.

According to the report, $1 million of Epic’s total estimated earnings came in the first three days after in-app purchases were activated. The performance puts Fortnite well ahead of similar battle royale style games Knives Out and Rules of Survival, which earned approximately $57,000 and $39,000, respectively, when they debuted.

A separate report from Apptopia adds color to Epic’s release, noting the game now sits in the No. 1 overall App Store spot in 89 markets. Currently the second-highest grossing game in the U.S. behind App Store stalwart Candy Crush Saga, Fortnite appears in the top-ten highest grossing charts in 15 markets, the analytics firm says.

 

Source: Fortnite estimated to have grossed $1.5M in in-app purchases after 4 days on iOS App Store

Corning beats, but smartphone comments will be the near-term guide for the shares

Corning beats, but smartphone comments will be the near-term guide for the shares

 

Amid a falling stock market open this Tuesday morning, which comes on the heels of a Monday that was the worst day thus far for stocks in 2018, Disruptive Technology company Corning (GLW) reported better than expected December quarter earnings, beating on both the top and bottom lines. The sparse release from the company showed positive results across the majority of its business and hinted at expectations for the company’s top line to rise 5% this year. All in all, a solid report ahead of the company’s 8:30 AM ET conference call, which should shed far more details on its quarterly results and outlook. It’s that more granular view, especially for the smartphone market, that will determine how GLW shares will trade later today as well as those for Apple (AAPL) and Universal Display (OLED).

Piecing some comments together from its earnings press release, it appears Corning’s Display Technologies business (31% of sales) will continue to benefit from larger screen sizes and better LCD glass pricing, while Optical Communications (34% of sales) is expected to grow 10% year over year due in part to a contract with Verizon (VZ) as well as ongoing backhaul demand. That year over year improvement at the Optical Communications segment is forecasted without any benefit to be had from the recently acquired 3M Communications Market Division. Two of the company’s other segments – Life Sciences and Environmental Technologies – are slated to deliver positive sales gains, but there is some rather cryptic wording for the company’s Specialty Materials business (14% of sales)

As I noted above, Corning is holding its December quarter earnings conference call this morning and we expect the dialog to be had to provide far more details on management’s expectations as well as the dynamics, such as smartphone shipment expectations for the first half of 2018, that will impact product mix and profits. Current consensus expectations have the company delivering EPS near $1.80. Because the company’s Display Technologies business accounted for 46% of earnings in the December quarter and 47% in all of 2017, we expect Wall Street to pepper the company with questions surrounding iPhone production levels in the coming quarters. Those answers will determine the likelihood of those 2018 EPS forecasts that fall between $1.64 – $1.98 per share. Quite a wide berth, and the answers will determine if there is upside to our $37 price target.

I have shared there is much speculation over iPhone X production levels to be had, but we would remind subscribers the iPhone X is just one of Apple’s smartphone models. That said, given the rapid rise in the overall stock market year-to-date, up 6.7%-8.2% across the major market indices after yesterdays’ performance, and the 7% increase in GLW shares over the same time frame, Corning’s smartphone commentary could weigh on the shares if it indicates an overall weaker than expected smartphone market. It will also help chart the near-term direction for the Apple and Universal Display shares on the Tematica Investing Select List.

From my perspective, we are hearing reports of larger format smartphones from Apple and others hitting shelves later this year. Paired with the growing adoption of larger format organic light emitting diode (OLED) displays on both smartphones and TVs, as well as burgeoning demand for backhaul technologies that should grow in the coming quarters as 5G networks are built, we’ll use any pullback to be had in GLW shares in the near-term to improve our long-term position.

 

 

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

 

KEY POINTS FROM THIS ALERT:

  • Last night Applied Materials (AMAT) delivered another beat and raised its quarterly outlook due to strength across the board in its semi-cap and display equipment businesses.
  • Based on the strength of Applied’s chips and display business, we are once again boosting our price target on AMAT shares, this time to $70 from $65. We continue to rate AMAT shares a Buy at current levels.
  • We are also boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.

 

After the market close, Applied Materials (AMAT) reported stronger than expected October quarter EPS and raised its outlook for the current quarter relative to consensus expectations. Powering that boosted outlook is the company’s backlog, which now spans $6.03 billion, up 32% year over year, with increases in semiconductor systems, display, and other businesses. Reviewing the company’s results and its drivers — which include the rising demand for chips as our Connected Society and Disruptive Technologies investing themes continue to expand as well as robust demand for organic light emitting diodes displays — we are boosting our price target on AMAT shares to $70 from $65.

In my view, Applied’s CEO summed up what is driving its business rather well on the earnings conference call last night:

“In the annual war for leadership in the smartphone market, handset manufacturers are adding more and more functionality to their devices. IoT applications are expanding rapidly and data generation is exploding. Major inflections are taking place in the data center, and there’s an emerging battle for leadership in high-performance computing and artificial intelligence. And there is huge demand for new display technology, while at the same time, average screen sizes for both TVs and mobile devices are growing considerably.”

  • Based on the strength of Applied’s chips and Display business, we are once again boosting our price target, this time to $70 from $65.
  • We continue to rate AMAT shares a Buy at current levels.

 

 

The October Quarter and AMAT’s Outlook

For the October quarter, Applied delivered EPS of $0.93 excluding non-recurring items on revenue of $3.97 billion, up 41% and 20% year over year, respectively. Sales improvements were had at all three of the company’s business units – Semiconductor Systems (up 14% year over year), Display (up 50% year over year), and Applied Global Services (up 20% year over year). Profit margins rose nicely at the Semiconductor Systems business, but it was the jump in margins at the Display business to 31.8% from 22.8% in the year-ago quarter that led the company’s overall margins to move higher.

On the housekeeping front, during the quarter Applied spent $385 million to repurchase 8 million shares of common stock at an average price of $48.65. Given the health of its business units, Applied should continue to generate ample cash following the $3.6 billion it generated over the last 12 months (roughly 25% of revenue), the company continues to look at returning capital to shareholders. Applied has a track record of boosting its dividend, but on the earnings call, last night shared that as we get clarity on tax policy it will revisit its mix of share repurchases vs. dividend increases. I see that as a rather prudent move, but either way, it means more capital being returned to shareholders, which is not a bad thing at all in my view.

Based on the strength of its markets and its backlog, Applied’s view is it will earn EPS of $0.94-$1.02 on revenue between $4.0-$4.2 billion in the current quarter. That makes the October quarter another “beat and raise” one for the company given current quarter expectations for EPS of $0.91 on $3.97 billion in revenue. I expect AMAT shares will trade up on this news, and with the underlying drivers pointing to a continued upcycle for chips and display, I expect a number of price target hikes to be had in the coming days. Team Tematica will continue to monitor the demand drivers for Applied’s business to determine if the company’s beat and raise track record is likely to continue in 2018. Based on what we’ve seen so far, we are inclined to think that is more likely than not.

 

Boosting our Universal Display Price Target

On the earnings call last night Applied Materials also shared that it now sees demand for its Display business even stronger than it last forecast, which called for 30% growth year over year. What I found more compelling, however, was that based on the investments being made in the display industry today Applied sees roughly half — 50% — of all smartphone screens being organic light emitting diode displays by 2020. That is far stronger than the IHS forecast that called for organic light emitting diode displays to account for 40% of all smartphone screens by 2022.

With the outlook for this display technology expanding more rapidly than expected in smartphones, plus ramping in the use of OLEDs in other markets (TVs, automotive lighting, general illumination), the outlook for Universal’s chemicals and high margin licensing business looks even brighter. This, in turn, has us once again boosting our Universal Display price target to $225 from $200.

  • We are boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.
Why we’re nonplussed on Apple even if the iPhone X is Awesome

Why we’re nonplussed on Apple even if the iPhone X is Awesome

While we too are interested in what Apple (AAPL) will be unveiling tomorrow, we’re not in the camp that expects the company to deliver a “shock and awe” presentation as it showcases its latest and potentially greatest iPhone model. Make no mistake, Apple’s iPhone business is impressive given its market share, margins, and cash flow generation, and it’s a device that many of us, including us here at Tematica, could not live without. The issue is the iPhone appears to be an increasingly iterative one in a market that is plagued by slowing growth and reliant on the upgrade cycle.

The reality is that while Apple will likely continue to enhance the iPhone, and pick up incremental share along the way, it’s no longer the disruptive device that redefined the company and the category. Rather, given the size of the iPhone business, relative to Apple’s revenue, profits, and cash flow, it’s one that it needs to fight and keep up with product upgrades, even as it has ratcheted up its R&D spending in 2016 and 2017. When we’ve seen such activity at Apple in the past, it has often led to new products and new product categories, which keeps us hopeful for the long-term. That said, Apple isn’t the only one that is ramping its R&D spending as our Connected Society theme continues to disrupt existing business models. We’d point to Amazon (AMZN) as the innovator to watch.

 

What We Can Expect to Hear from Apple

The excitement and rumor mongering over the last few months will soon be over tomorrow, September 12, as Apple will unveil it latest iPhone model or potentially models. Also, if the internet chatter is to be believed, upgrades for its Apple TV and Apple Watch products will be on presented as well.

Recent software leaks suggest the unveiling of several iPhone models, with at least one of them including new features in the device itself — things such as Face ID and augmented reality as well as an organic light emitting diode display (OLED). Aside from the hardware, there will be a bevy of new features associated with the latest version of the iPhone operating system, iOS 11. Candidly we’re not all that sure about the “Animoji” feature that uses the 3D face sensors to create custom 3D animated emoji based on the expressions you make into the camera. Our thinking is this feature could be like steroids for the selfie market. Rather than digress, we are very excited about the productivity features inside iOS 11 and what they mean for the iPad. We’ve been beta testers of the iOS 11 on our own iPads, and the improved split screen capabilities alongside true drag and drop, at least in our view, are going to make the iPad what many hoped it would be several years ago — a perfect device for working while on the go.

As great as the new iOS and other new products are likely to be — like the purported Apple Watch with built in LTE connectivity —, the big kahuna at the event will be the iPhone, and it is expected to come along with just as big of a price tag. While there have been many headlines discussing the potential $1,000 price tag for Apple’s new high-end smartphone, let’s remember there are a variety of financing mechanisms from mobile carriers like AT&T and Verizon Communications as well as Apple’s own iPhone financing program.

Yes, some will balk at upgrading to the iPhone X because of its price or lack of a “wow-factor”, but we also know there is a cohort of consumers that see owning the latest Apple device as the latest status symbol for our Affordable Luxury investing theme. We also expect Apple will once again under-produce relative to initial demand, magically once again leading to the latest and potentially greatest iPhone being sold out. Make no mistake, we here at Tematica love all the Apple products we have, and we have plenty of them, but there is no easier way to stock out a new product than to restrict its initial supply. Of course, this only adds to the allure of being an early adopter, much the way until fairly recently spotting a pair of  Apple’s Air Pods has been akin to seeing a unicorn.

We are not surprised to see Apple potentially bringing multiple models to market as it looks to target share gains with the rising middle class in markets such as India and China as well as other more price-sensitive emerging economies. With the iPhone, likely the first internet connected device to be had by a person in these geographies, the device is a beachhead in which Apple can leverage its sticky ecosystem of products and services, in particular, its Apple Pay feature. If Apple is as successful as it has been in the U.S. and other developed markets, it’s a large opportunity for the company as well as shareholders.

The issue with Apple’s global expansion plans for the iPhone is that larger adoption of products and services takes time, and this means that if Apple is successful with these new iPhone models it will continue to be a trapped by its own success. By this we mean consumers flocking to the latest model in droves during the first six months of its release, only to see sales fade as potential buyers wait for the next new model to be had. If this cycle remains, it likely means Apple remains a seasonal business tied to the annual introduction of iPhone models… at least until it introduces either a new product category or an existing business segment delivers a new breakout product that turns the business mix on its head. Given the size of the annual iPhone business relative to the sizes of the Mac, iPad, Services and Other Products business segments, the latter is a daunting task to expect.

Perhaps the greatest risk to the new iPhone is the possibility that between Apple iOS beta software program and the annual rumor mongering, not to mention a disgruntled employee or two, much of what’s been slated to be shared for the new model has already been leaked. This could lead to a meh reception of what has been touted as a “make or break product for Apple.”  In other words, without an unexpected new, new thing to further implant Apple in our Connected Society investing theme, Apple shares could fall victim to “buy the rumor, sell the news” following tomorrow’s special event.

Once again, the herd catches up on Universal Display (OLED) shares

Once again, the herd catches up on Universal Display (OLED) shares

After languishing for several weeks, shares of Disruptive Technology company Universal Display (OLED) shares over the last two days popped $16, or more than 14%, to finish close last night at $127.10. The catalyst for the move was Deutsche Bank initiated coverage on the company with a Buy rating and a price target of $135, in line with our own.

While we like the herd catching up to our way of thinking, the surge in the shares comes with less than two weeks until Apple’s (AAPL) next iPhone event on September 12. We suspect over the next two weeks the iPhone rumor mill will be once again cranking up, with much chin wagging over the number of models, form factors and how many models will be employing an organic light emitting diode display. This likely means that at least in the short term, OLED shares are likely to melt higher, but as we’ve seen many, many times the devil is in the details when it comes to Apple’s new products. That means expectations in the near-term could get ahead of themselves, and we note this with 6% upside to our $135 target.


Make no mistake, we continue to see a bright future ahead for Universal Display and its organic light emitting diode chemicals and IP business over the coming quarters as the number of applications climbs alongside increasing screen sizes for smartphones and TVs. This has us long-term bullish on the shares, and while it’s likely that we might have to raise our price target on OLED shares again before the end of 2017, the risk we run in the very short-term is the shares are ahead of themselves at least temporarily.

Could this result in a “buy the rumor, sell the news” set up given Apple’s upcoming event? It’s possible, but given the medium- to longer-term growth prospects, we would see that as an opportunity for those that have missed out on scooping the shares thus far. As we’ve shared in the last few weeks, the $110-$115 share price band makes for a compelling proposition on risk-to-reward trade-off for patient investors. As new data becomes available, we’ll incorporate it into our thinking, including our price target.

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