Considering marketing spending beyond the roughly $537B in global measured media, suggests a more than $1.5T market, where digital makes up less than 10%. Given the inherent advantages of digital – targeting, acquiring customers, tracking behavior, facilitating transactions, building loyalty, etc – we believe that spending can maintain a double digit CAGR for years, perhaps even accelerating as TV ad spending recedes. Against this, we believe that the winners will have to combine broad reach, sustainable user engagement, attractive demographics, precise user profiles, effective context, compelling native formats and powerful ad sales/campaign management tools. Against these criteria, GOOG, FB, and TWTR stand out, positioning that is corroborated by dominant market share, and, for FB and TWTR, torrid revenue growth. With our bullish view on future digital ad spending and an expectation that the benefits will be disproportionately concentrated to a few platforms, we see substantial upside for all three. AMZN, LNKD, NFLX, MSFT and AAPL are in the next tier, with clear advantage on some factors but serious weakness on others, requiring strategic change and focused investment to fully address ad opportunities. We are concerned for declining ad franchises – e.g. YHOO, AOL, IACI, etc. – and for subscale recent entrants – e.g. P, YELP, SnapChat, Pinterest, etc. – who could be casualties of the growing market concentration.
The fashion focused Apple Watch will launch 4/24 with high prices and predictable functionality, yielding limited volumes, but reasonable revenues and excellent profits during the first year. The $349-$399 entry point is too high for most users, most of whom enjoyed carrier subsidies when buying their iPhones. The use case is hazy. So far, most of the apps simply save the user from pulling their phone out of their pocket – nice, but hardly killer. Still, the product is cool, and the 18k gold versions selling for up to $17K will find a hungry market amongst the celebrities and plutocrats that can afford them. We believe that fewer than 12M units will sell in the first year, but that the ASP could be $800 or more, yielding as much as $10B in revenues, with contribution margins above 50%. Still, with nearly $70B in EBITDA, even a $5B incremental boost doesn’t move the needle very much. We believe that the replacement rate on the Apple Watch will be long, so growth will depend on finding a killer app to drive a 2nd and 3rd wave of user adoption.
We assessed the valuations of 187 US traded large cap TMT stocks, separating their EV into near-term and long-term components and graphing them on these axes. In the framework, the names fall into quadrants that have interesting implications for trading. This quarter, we are looking more closely at the “Death Watch” – i.e. stocks with below average 5-yr cash flow growth expectations and where the implicit 5th year terminal value represents less than 75% of the total EV. Amongst these 47 names are a motley crew of old IT suppliers and fallen internet stars who’s best days are likely behind them, but also several post-peak cyclicals, industry vertical suppliers, and a few surprises. We see particular opportunity in MSFT, QCOM, STX and WDC, where we feel management has navigated past obvious dangers and where their positions for the future are poorly appreciated. We also note that AAPL has fallen from the skepticism quadrant into the death watch – its recent cash flow performance has been so strong, that analysts and investors no longer project significant growth, perhaps also discounting its overseas cash assets as well. We are sympathetic to this perspective, although we are keeping AAPL in our Large Cap Model portfolio, which outperformed its benchmark in the quarter by 40bp, up 950bp. We are swapping STX for WDC, and PAY for AMZN. Our Small Cap Model Portfolio underperformed dramatically, up just 110bp, on very poor performance from OPWR, MRIN, RKUS and WWWW. We are removing JDSU, WWWW and MRIN, along with CNVR, which was acquired. We are adding HUBS, RENT, QLYS and SMCI in their place.
The Title II reclassification of broadband reflects a sea change in policy and is a substantial threat to the long term growth and profitability assumptions at the core of cable and telco valuations. The overwhelming public support for restraints on wireline and wireless carriers trumps the aggressive industry political spending, and even without explicit price controls, the proposed action would create an empowered FCC clearly aligned to act on the interests of consumers. We do not expect legal or legislative challenges to bear fruit, given the firm FCC mandate in law, the weight of public opinion, and the growing ability of the internet community to drive political action. We also believe that the perspective reflected by this proposal makes it unlikely that the FCC will approve the pending CMCSA/TWC merger.
- TWTR doesn’t have a user problem – it has a registration problem, and it’s taking steps to fix it. Meanwhile, it has the most easily monetized platform this side of GOOG search.
- Adjusted for change in the integration of iPhone users, MAUs accelerated to 21.7% YoY growth, with initiatives now rolling to improve onboarding of 500M monthly anonymous visitors
- Attractive demographics, unique interest graph, powerful native formats, off site reach, multi-media integration very attractive to advertisers. Ad density and pricing have LONG runways.
- Our model still shows upside to $70+ on strong revenue growth and margin expansion going forward. Resolution of MAU controversy can catalyze a significant rerating.
4Q14 was a lot like most other recent Twitter quarters in many respects. Revenues were up 97% YoY against a tough compare and smashed consensus expectations. EPS, setting aside the big chunk of employee stock compensation, was a solid $0.12, doubling consensus on strong 30% EBITDA margins. Reported monthly active users (MAU) was seemingly disappointing at just 288M, up only 4M from the 284 reported the previous quarter. In the past, this was enough to crush the stock.
US TV advertising has crested and is beginning its inevitable decline. In an era of rising transmission fees and a vigorous market for content licensing, media companies have been reporting disappointing revenues for their TV network units – the result of poor ad sales. The networks drove through rate increases during last May’s Upfronts at the cost of reduced volume, a strategy that appears to be backfiring after poor ratings during the Fall season and a correspondingly weak scatter market. Meanwhile, Nielsen, whose methodology we believe is significantly biased toward over counting, acknowledges declining viewership for channelized TV, while advertisers decry the accompanying deterioration in the attentiveness of that audience toward their commercials. These viewers are migrating to streaming video, in their living rooms as well as on their mobile devices, and advertisers are shifting their attention to digital as well. The extraordinary trajectory of online advertising, reflected in the double and triple digit ongoing growth in ad revenues at GOOG, FB, and TWTR, has begun to eat into TV’s piece of the pie. Big advertisers, in traditional categories like autos, consumer products, telecommunications and financial services, are explicitly stating their intention to shift budget dollars from TV to digital, while broader surveys of marketers suggest the same thing.
- AMZN jumped nearly 9% after hours after turning in a surprise $0.45/share profit, while GOOG held serve on a nominal miss caused by a 4% YoY FX hit and a few one-time items.
- AMZN was typically cryptic, but highlighted strong growth in Prime and its recent price increase as drivers of the EPS upside.
- GOOG’s sales and earnings would have topped consensus w/o FX effects, and cost-per-click would have been up slightly YoY. Management highlighted investments in ad tech that are driving sales
- AMZN may be out of the woods with investors for the time being and GOOG may be ready to take the next step with its big initiatives in ad tech, e-commerce, and the digital home
TMT heavyweights AMZN and GOOG capped off a busy week in earnings with topline misses, while the former delivered an unusually high earnings beat sending shares of AMZN as high as 13% in the after hours session. GOOG dipped a couple points on the earnings release but reversed course after the call with the stock up 1.4% as a messy quarter was brought into context. Like their tech peers that reported earlier in the week, both AMZN and GOOG also reported FX issues, with impacts of -4% to their toplines. Both would have easily topped consensus revenue otherwise. For AMZN, the earnings surprise shows Bezos is answering the bell, not because of Wall Street, but to avert retention issues when it comes to his employees. For GOOG, the second straight miss taken in context of a quarter with unusual FX headwinds and large one-time real estate investments shows the business is otherwise continuing the course dominating digital advertising.
- FB and QCOM both beat consensus expectations for Dec Q sales and EPS handily, however rising costs at FB and skittish guidance from QCOM sent both stocks down after hours, QCOM sharply so
- QCOM lost some SoC business w Samsung, suffers from AAPLs share gains, and awaits resolution in China. These factors will weigh on 2HF15, but are not catastrophic. We see upside to guidance.
- FB is rapidly growing its expenses, as it previously advised, aiming to offer users new services that can be monetized – e.g. video. Investors fear initiatives will eat profit, a la AMZN and GOOG
- Both companies are with positioned for the long run with potential 2015 catalysts – Chinese resolution for QCOM and expenses kept with in guidance for FB
Both FB and QCOM delivered outstanding numbers after the close today, yet both were down after hours on investor skittishness over guidance. Despite delivering another healthy beat on nearly 49% YoY revenue growth and hitting a $12B annual revenue milestone, shares of FB were off -2% as investors were concerned new initiatives would sap profitability. For QCOM, which handily beat consensus and announced resolution of a dispute with a large Chinese licensee, a trifecta of issues including the loss of some Samsung business, Apple’s surge in market share, and an investigation by Chinese regulators weighed heavily on the stock sending it down over -8% in the after hours session. Like their tech peers who already announced earnings, both companies also indicated FX challenges with FB forecasting a 5 point hit, while QCOM’s exposure is a bit more muted given the company’s exposure to Asian markets which haven’t been impacted as much as Europe. Still, both companies have the potential to deliver upside against expectations, with potential 2015 catalysts setting up both companies for the long run.
- AAPL sold 74.4M iPhones in its 1QF15, up 46% YoY and nearly 10M above consensus – with an ASP of $687, up 7.8% YoY – driving sales of $74.6B and EPS of $3.06, both WAY above expectations
- The iPhone is now 68.6% of AAPL sales and likely, 80%+ of its profits – by far the biggest share ever. Mac joined the party, with units up 14.5%, but iPad units were down 17.7% with a lower ASP.
- Guidance for 2QF15 sales of $52-55B is slightly above consensus. This is strong given FX headwinds and implies continued iPhone strength and initial Apple Watch shipments ahead.
- The iPhone 6/6+ satisfied pent-up demand for bigger screens, pulling many upgrade sales forward. With the good news on the table and TOUGH compares ahead, we expect AAPL to crest soon
Apple delivered an epic blow out, besting even the most bullish analyst numbers. It sold 74.5M iPhones, crushing the record 51M sold in the year ago quarter by 46%. The astounding volume did not come at expense of price, as the ASP increased 7.8% YoY, driving iPhone revenues up by more than 57%. The price rise is a clear indicator of the success of the 5.5 inch 6 Plus model, which sold at a $100 premium to the 4.7 inch iPhone 6 and was the bellwether in the 70% YoY growth in sales to Greater China, now almost 20% of total revenues. As a result, Apple total sales of $74.6B were up 30% YoY and 14.7% higher than consensus, while its EPS of $3.06 were up 48% YoY and 17.7% above expectations. For all other companies watching – THAT is how you beat a quarter.
- MSFT’s 2QF15 beat on both the top and bottom lines. Adjusting for one-time items, EPS was $0.77 ahead of the $0.71 consensus, and sales of $26.47B edged expectations on 7.9% YoY growth.
- Businesses central to the “mobile first, cloud first” strategy – Office 365, Azure, Surface, and server products – performed very well in the quarter, and are positioned to continue the trajectory.
- Several traditional businesses – i.e. consumer Windows, Office packaged software, and Xbox – were weak, spooking some investors who took profits and sent the stock down 4% after hours
- MSFT is delivering strong growth while aggressively shifting to the cloud, navigating the decline of front-loaded SW sales, the end of the Windows upgrade cycle, and a challenging int’l market
Just a week after showcasing the impressive Windows 10, Microsoft delivered a respectable 2QF15 beat on both the top and bottom lines, evidence that CEO Satya Nadella’s “mobile first, cloud first” strategy is working. The $26.47B in reported revenue beat expectations of $26.27B, while $0.77 in adjusted EPS, after adding back one-time Nokia integration and IRS audit expenses, easily topped the $0.71 consensus. The quarter saw Microsoft navigate well through some short term headwinds that included the end of the Windows 8 upgrade cycle, a transition to the cloud subscription model with less upfront revenues than its traditional packaged software business, weak international demand from China, Japan, and Russia, and a challenging foreign exchange environment with a strong US dollar. With the commercial and consumer cloud segments up 45.7% and 30.0% respectively, along with a sixth consecutive quarter of triple digit growth for Azure, everything points to a successful transition to the cloud. Still, the unavoidable struggles of the company’s older businesses spooked investors who took the stock down 4% in after hours.