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August 24, 2015 – Quick Thoughts: Move Along Citizens, Nothing to See Here

Written August 24th, 2015 by

Quick Thoughts: Move Along Citizens, Nothing to See Here

The traffic back from the Hamptons may have set a record Monday morning as the Dow opened down a shocking 1000 points on general squeamishiness catalyzed by another sharp drop in Chinese stocks overnight. TMT stocks, seen as risky with their high multiples and high betas, have taken a beating over the past week, capped by the Monday rout. NFLX, hailed as a conquering hero on its 2Q earnings and environment, is off 12.3% vs. last week. AMZN, crushing it in both bellwether retails sales and in its recently broken out AWS business, is down 11.2%. GOOG is off10.3% despite solid numbers and a shareholder friendly restructuring announcement. MSFT may have seen its cloud revenues up 98% in 2Q, but its stock has declined 10.1%. AAPL? Down 9.3%.

With the strong performance of the TMT leaders prior to this recent slide and with the loft valuations accorded in private financings for companies like Uber and Snapchat, there has been chatter amongst pundits and value focused investors of a new tech bubble, a perspective that may have stoked the relatively strong downdraft amongst the tech stocks. Having been followed the networking sector through their rise and calamitous fall at the turn of the millennium, we don’t see it this time. Most of the highflyers brought to earth during this recent shock are robust businesses with long visibility to years of growth and to growing profitability. Indeed, we believe that some of these businesses could prove significantly MORE resilient to a global recession than the broader market.

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The Day the Bundle Died

Written August 13th, 2015 by

The Day the Bundle Died (Excerpt from August 12, 2015 – Video Media: The Cord Cutting Myth Gets Real)

One by one, media company CEOs have put a brave face on the state of the cable bundle despite the ample evidence of its deterioration. The shrinking number of pay TV subscriptions? “A slow leak that is unlikely to accelerate.” Falling ratings? “Nielson is not counting all of the viewers watching on a time shifted basis.” Weak upfront ad sales? “Ad buyers are simply choosing to hold back their decisions until much closer to the air date.” Ad revenues down year over year? “To be expected after the mid-term election spending in 2014.” Pay no attention to the man behind the curtain – the cable bundle is wise, powerful and eternal!

Or not. Media investors have awoken from a five year coma to discover that cord cutting is real after all. DIS CEO Bob Iger’s admission that even mighty ESPN was facing falling subscriber counts and soft ad sales shook them into a panic. The next day – a Black Tuesday for US media stocks – DIS, CBS, FOX, TWX, CMCSA, VIA, DISCA, and SNI dropped an average of 8.2%. After Wednesday, these 8 companies had shed a collective $46.2B in market cap. Ouch.

Separating out CMCSA and its massive cable system business, the remaining 7 media giants trade at a collective cap weighted P/E of 17.9, still suggesting better than market cash flow growth and ahead of their long term average. Consensus analyst expectations still suggest 4.7% sales growth over the next 5 years, perhaps due for some significant revisions.

Meanwhile, nearly a month prior NFLX CEO Reed Hastings laid out the picture from the opposite angle. Subscriptions were up 17% to 42M in the US, with domestic viewing hours up 40%. Assuming 1.5 viewers per stream, Netflix’s average audience is now bigger than any US network, cable or broadcast, and growing. Around the same time, Susan Wojcicki, head of GOOG’s YouTube business, shared some similarly impressive numbers. YouTube monthly viewership is up 40% YoY, and the total watch time is up 60%, the fastest growth in more than 2 years, to more than 10B hours per month. Mobile, which now accounts for more than half of those viewing, had a 100% jump in ad revenues YoY.

The TV industry’s response has been cautious, licensing live feeds to DISH, SONY and, likely, AAPL for skinny bundle OTT services, but refusing to allow cloud-based DVR functionality. Trends suggest that online linear TV may prove less than popular. Hub Entertainment Research recently reported that 53% of all US video viewing is time-shifted – DVR, on-demand, or streaming – with millennials even less likely to watch linear TV. TWX and CBS have jumped in with on-demand streaming versions of their premium channels, but at price points too high to encourage cord cutting.

We believe network TV is at the beginning of a long squeeze between weakening fees and ad sales on one side and rising content costs on the other. Streaming rivals will have increasingly larger scale, better data, and deeper pockets to buy more of the best content, including the life blood of linear TV – live sports. We acknowledge that the exodus that has begun will take many years to complete, but it is, nonetheless, inevitable. Media players that are diversified away from the cable bundle, e.g. DIS, or already moving to solidify their bona fides as streamers, e.g. TWX, may fare better than others, but all will suffer. Meanwhile, NFLX and GOOG should continue to reap the rewards of their dominance for online video. AMZN and FB have intriguing opportunities in what should be a huge market, but neither is likely to challenge for leadership. We also note that ad hoc live streaming, pioneered by TWTR’s Periscope and the startup Meerkat, is an intriguing extension to the YouTube paradigm and could be the “next big thing” in video.

For our full research notes, please visit our published research site.

August 12, 2015 – Video Media: The Cord Cutting Myth Gets Real

Written August 12th, 2015 by

Video Media – The Cord Cutting Myth Gets Real

The death of the multichannel cable bundle will take years to play out, but investors were reminded of its inevitability by the signs of erosion from even the best regarded media players. TV viewing is in decline. Pay TV subscriptions are falling. TV ad sales are down. Meanwhile, viewership is booming for NFLX and GOOG’s YouTube, as Americans are expressing a strong and growing preference for streaming on-demand video. The TV nets are coming late to the game, licensing linear streams to OTT players, like DISH, SONY and likely AAPL, offering skinny bundles online. We believe that the OTT bundles are unlikely to stem the tide toward on-demand streaming, damaging traditional media brands, and leaving them at a growing scale and data disadvantage in competing for creative content. Rising programming costs, particularly for live sports, will squeeze networks simultaneously suffering from top-line erosion. NFLX is the clear winner in subscription on-demand streaming, likely to continue its explosive sub growth with significant future monetization options. AMZN is best positioned to be number 2, ahead of TWX and its overpriced HBO Go. YouTube dominates the similarly fast growing ad driven, short-form video paradigm that it pioneered. We do not see FB as a threat to YouTube’s primary use cases, although its newsfeed has proven a robust channel for auto-play video ads.

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Quick Thoughts: Google’s New ABCs

Written August 10th, 2015 by

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Quick Thoughts: Google’s New ABCs

The announcement that Google would reorganize itself and take the name Alphabet had the ring of one of the company’s infamous April Fool’s pranks, posted to the same company blog used for the annual tomfoolery. The name itself is whimsical, and if this announcement had been made a few months earlier, it would have been hard not to take it as an elaborate joke – think of Larry and Sergey jumping in front of Apple in alphabetical order, just as Steve Jobs once picked the name Apple because it preceded his former employer Atari in the phone book. The move to add a layer of management and take a conglomerate style structure runs counter to the trend toward spinouts in the world of TMT.

Still, despite the whimsy and surprise, this creative move makes sense. It is a signal that the company is willing to accept more accountability for its investments, which will be easier for investors to evaluate extracted from the core business. This change also gives those investments more attention from management, perhaps encouraging more a more aggressive agenda of investing in long term winners while culling ideas that don’t pan out more quickly. Businesses like Nest, Fiber, Project Fi, autonomous vehicles, robotics, Calico and others could benefit from a bit more light and visibility.

The move also opens more C level jobs for the company’s deep bench of executives, many regular targets of recruiters looking to fill CEO slots elsewhere. In particular, it elevates highly regarded Sundar Pichai to the top slot at Google, putting the operating responsibility for Alphabet’s revenue and profit engine in the right hands, leaving co-founders Page and Brin to strategic positions at the top of the holding company. Core Google has many promising opportunities on its plate, and Pichai can pursue them aggressively without the distraction of moonshots. This is a good thing for the company and for investors.

Meanwhile, this move leaves Alphabet better able to pursue value-added acquisitions while it works to resolve antitrust charges from the European Union. Twitter, EBay, Spotify, and even Tesla become realistic possibilities under this structure. Imaging Elon Musk as CEO of a wholly owned Alphabet subsidiary with responsibility for the further development of autonomous vehicle technology. In the current environment, such moves would have been unthinkable if tied directly to Google’s core search business.

Investors apparently agree with my optimistic take on Alphabet, taking GOOG stock up 5% after hours once the blog post hit. The 2Q15 results, showing new discipline on expense controls and strong growth from the core business, assuaged a number of market concerns. This reorganization could provide the energy to keep the trajectory moving up and to the right.

For our full research notes, please visit our published research site.

Quick Thoughts: Everybody Hates Twitter

Written July 28th, 2015 by

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Quick Thoughts: Everybody Hates Twitter

The monomaniacal focus on MAUs does TWTR a disservice – it is a lot more like YouTube than Facebook, and no one cares about Google’s MAUs. Project Lightning and an aggressive marketing campaign to educate consumers should stimulate engagement and keep the strong ad growth going. For now, TWTR is one of the few places to buy real growth – 64% growth in the face of 8% FX headwinds – at a discount.

The trading around TWTR’s 2Q15 earnings report was quite a ride for investors. At first, the stock rose more than 5% on sales and adjusted EPS that blew past expectations that had been tamped down after the widely reviled 1Q15 results. 64% top-line growth against a stiff FX headwind is nothing to sneeze at, and the $0.07 earnings number showed significant progress toward strong future profitability, even if the company is still dealing out shares to employees at a somewhat profligate rate.

Then came the second wave. First, naysayers glommed on to the fact that MOST of TWTR’s rise in MAUs came from users accessing the service via messaging platforms on feature phones rather than the full-fledged smartphone app. Fair enough, but Facebook, which doesn’t breakdown the number of its MAUs which access it via messaging apps, spent 10% of the company acquiring WhatsApp and its now 600M users for just the same type of access. Then, parsing the numbers a bit more, a new negative theme broke free – US MAUs were static quarter to quarter. By then, the stock had given back all of the rise and then some. At the end of the conference call, when management refused to give any information about the ongoing CEO search, TWTR shares settled to down more than 10% from the close.

This 2 hour frenzy of after hours action was a bit of a microcosm of TWTR’s life as a public company – fast out of the gate with big revenue growth and strong monetization trends, but slammed for its inability to post the kind of growth in registered monthly active users that had been delivered by Facebook. This investor fixation on MAUs has been a huge burden for the company, which is undoubtedly sorry that it had emphasized the metric so much in its IPO prospectus. It turns out that there are a lot of monthly visitors coming to TWTR and reading its content without registering. In this, it is a lot more like Google, which just threw in the towel on making its anonymous YouTube and Search users log in with Google+, than it is like Facebook, which bases its entire application around requiring each visitor to sign in. Google investors are happy enough with the billion plus YouTube users, even if they don’t know exactly who all of them are.

To that end, TWTR finally has some concrete plans to start monetizing the hundreds of millions of visitors that it claims to have – Project Lightning will let users immerse themselves in events and breaking news while getting relevant advertising, without logging in. A partnership with Google will lead new users to TWTR content. New marketing programs, long overdue, will promote and explain the value of Twitter to consumers long confused about its usefulness. Basically, a light bulb has come on above the heads of TWTR management, and maybe, the issues that have plagued it in the eyes of investors may be put behind it.

Meanwhile, I think the critics have gone a bit far. The Facebook favorite MAU metric is not fully indicative of TWTR’s assets – its critical mass of key opinion makers in every imaginable field, its timeliness advantage, the hundreds of millions who are aware of the service even if they haven’t registered. 64% YoY growth in the face of an 8% currency headwind despite the disappointing user number is evidence of the value of the platform to advertisers who understand the quality of TWTR’s interest data and the effectiveness of its native formats. Over a year ago, I pointed out that TWTR’s main problems were the poor design of its consumer app and the absence of effective marketing to sell its use case to the public. Finally, Project Lightening is due in 4Q, along with a real marketing campaign and, perhaps, a Chief Marketing Officer. Maybe this time the light at the end of the tunnel is not just another train.

For our full research notes, please visit our published research site.

Quick Thoughts: The Emperor’s New Watch

Written July 20th, 2015 by

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Quick Thoughts: The Emperor’s New Watch

The Apple Watch – Everybody has an opinion. Here is mine.

So how is the new Apple Watch doing after its first three months? Two weeks ago, market research firm Slice Intelligence roiled the waters with a report which, based on its analysis of e-mail receipts sent to its 2.5 million US panel members, suggested a 90% drop off after the first week of sales. Last week, CNN reported that the search volume for the Apple Watch, as reported by Google Trends, was a tiny fraction of that for iPhones and iPads, and even below that for the moribund iPod. Meanwhile, Wristly, a new web site launched specifically to examine the Apple Watch phenomenon, is just out with a survey of 800 self-selected members of its panel showing that they LOVE their Apple Watches to the tune of 97% satisfaction. These are the three data points that we have. Unlike most products in this internet age, the distribution of Apple Watch is closely controlled by its maker, and Apple isn’t talking.

This information drought on a relentlessly promoted new product leaves analysts uncomfortable. Analysts don’t like to look stupid, and over the past two decades no company has made more TMT analysts look more stupid than Apple. Over the past 15 years, it has blindsided the investment community with the periodic introductions of audacious new products and then again, as the consumer response to those products came harder and faster than even the most bullish voices had predicted. iMac, iPod, iPhone, iPad – these have been hero products and woe be the broker, journalist or pundit that staked their reputations on the bear side. The big screen iPhone 6, though not really a revolutionary new product concept, sold like one, taking Apple stock on another leg up as the most valuable company in the world. After all of this, when Apple so much as hints at a product, analysts take it very seriously – hence the annual hype cycle around the mythical Apple TV set and the respect paid to the potential of an Apple car in every iPhone user’s garage.

In this spirit, analysts and market pundits have been struggling for relevance on the new Apple Watch – hinted about for months, acknowledged with a vague announcement last September, and thrust into the market with a shock-and-awe marketing wave in April. Confronted with a real product with real specs but no real visibility into the actual sales, the pressure to have something to say about the product rose. An intrepid few went big early, forecasting that the Apple Watch would be a significant factor for the company in its first year – a tall order given Apple’s $200B plus in annual sales. A few others went the other way, mostly asserting skepticism over the addressable market or the learning curve rather than the quality of the product. Most hedged their bets.

In the absence of information, the prevailing hedged perspective on the Apple Watch has held that 1) the product concept is a paradigm shifting stroke of genius in the tradition of the iPod, iPhone and iPad; 2) near term demand may be muted due to consumer unfamiliarity with the use cases, a narrow library of early apps, and narrow distribution – issues also observed in the slow ramp for the iPod and iPhone; 3) the 2nd generation Apple Watch will resolve many unforeseen issues with the original model, while new apps begin to exploit the real potential of a wrist mounted computing platform; and 4) by 2017, the Watch will be another tent pole product for Apple, delivering significant contribution to the company’s top-line and bottom-line growth on its own, while also adding further advantage to the iPhone vs. rival products and thus, driving growth there as well. Ultimately, this is a faith-based argument, turning on the belief that Apple’s exemplary track record leaves it above question. It also protects the analyst from looking stupid – at least for the next year or two.

When the Slice Intelligence data point popped up on July 7, the market reacted to it, sending the stock on a three day 4% drop. Bloggers, many well respected tech market observers, were vigorous in defense, pointing out that Slice’s methodology of examining e-receipts received by its 2.5 million person US panel ignored many important segments of the Apple Watch market. A week later, the Google Trends data point hit, reported by CNN and others, right in the midst of and ignored by a NFLX/GOOG inspired tech rally that took Apple back to test its all-time highs. This week, the Wristly customer satisfaction report comforted Apple bulls, even though it carries similar methodological weaknesses as the Slice Intelligence report that had been so derided a week earlier. These data points may mean something or nothing, and Apple Fanboys are going to love and haters are going to hate.

As I sit in this same information void, I definitely lean to the skeptical side. I note a few media voices are beginning to talk more boldly about their own Apple Watch doubts. The always provocative Bob Lefsetz recently wrote a piece suggesting that Apple has lost its way in the aftermath of losing Steve Jobs, and that the Apple Watch was poorly conceived, designed and executed. You can read it here ( The Information’s Jessica Lessin wrote of feeling almost self-conscious with her Apple Watch, and her surprise at how few of the movers and shakers at Paul Allen’s Sun Valley conference wore one – she counted just 4 others, including Apple CEO Tim Cook. ( When I read these accounts, by writers that I consider thoughtful and honest, my confirmation bias kicks in and I feel my own suspicions rise. I have also been surprised at how few of my iPhone loving friends have sprung for the Watch and the fairly lukewarm praise from the ones that have. There are no real facts to support my position – or refute it – but I don’t really believe that the use cases, form factor, or price will captivate most consumers, even in a 2.0 version.

Maybe everyone is just waiting for Christmas. Maybe the market for Apple Watches is on fire in China. Maybe this is just normal, and sales will ramp steadily over the next few years the way that most analysts say that it will. Maybe – but I’m thinking probably not.

For our full research notes, please visit our published research site.

March 12, 2015 – Digital Advertising: The 7 Habits of Highly Effective Ad Platforms

Written March 12th, 2015 by

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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.

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March 9, 2015 – AAPL: High Priced, Cause it Feels So Nice

Written March 9th, 2015 by

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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.

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February 23, 2015 – TMT Model Portfolio Update: Escaping the Death Watch

Written February 23rd, 2015 by

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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.

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Net Neutrality: Reining in the Dumb Pipe Oligopoly

Written February 10th, 2015 by

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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.

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