Quick Thoughts: AMZN and GOOG – Looking for Some Investor Love

Written January 29th, 2015 by

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-       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.

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Quick Thoughts: FB and QCOM – Beat, Guide and Drop

Written January 28th, 2015 by

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-       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.

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Quick Thoughts: AAPL – Awesome! Epic! When Should We Sell?

Written January 27th, 2015 by

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-     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.

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Quick Thoughts: MSFT – Moving Quickly to the Cloud

Written January 26th, 2015 by

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- 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.

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Quick Thoughts: MSFT – Mobile First, Cloud First, CHECK!

Written January 21st, 2015 by

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-     MSFT revealed details on Windows 10 – tight integration btw phones, PCs and Xbox; free upgrade for Windows 7 & 8 users; traditional look but modern functionality; a powerful new browser, etc.

-     Free upgrade will drive fast adoption, reduce fragmentation, increase appeal to developers. Cross device integration adds valuable functionality and promotes platform loyalty. Big benefits for users.

-     Concerns over lost revenue are myopic – upgrades are a minor part of sales and reducing fragmentation will be a boon to cloud applications, which we believe will be the future of MSFT

-     CEO Nadella delivered some sizzle with the steak. Xbox support on Windows, the Spartan browser, the 84 inch Surface Hub conference room device, and the MSFT Hololens VR headset will draw press.

Upon rising to the top of Microsoft, new CEO Satya Nadella was clear in asserting a “Mobile First, Cloud First” future. Today’s event, giving details on the company’s new Windows 10 platform strategy affirmed that he is moving aggressively to build that future. Windows 10 is presented as a single platform designed to run on devices from a smartphone up to the newly announced 84 inch Surface Hub conference room system, and soon to be available for hundreds of millions of installed PCs as well. As a single platform, users will have a consistent interface and access to programs and files seamlessly across their devices, while developers will be able to easily adapt applications for the full range of device types as well. This is a big deal for taking the Windows platform, still the overwhelming device standard for enterprise computing, confidently into a future where devices in the workplace will be heterogenous and where workers will expect to access their files from their office, their home and their pocket.

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Quick Thoughts: NFLX – What a Difference a Quarter Makes

Written January 20th, 2015 by

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-     NFLX bounced back from its 3Q14 drubbing to surprise in 4Q with 4.33M new subs and EPS of $0.72, both well above guidance and consensus expectations. Shares traded up 14% after hours.

-     Original programming is paying off big time. It is much more cost efficient per view than bought content and NFLX will borrow to produce more. 1Q will see the launch of key new content.

-     International expansion has been VERY successful and will hit 200 countries by the end of 2016, with material improvement in contribution. This is the primary driver of 20-25% future growth.

-     Management denies interest in PPV, live streams, and ads. These remain valuable potential levers for further monetization and value for shareholders.

Three months ago, Netflix took it on the chin after delivering fewer new subs than it had promised and were expected. While there were clear reasons for the shortfall – an unexpected price hike and a lull in the introduction of new content – 31.1% YoY growth in subs and 27% growth in revenues didn’t cut it for investors, and the stock fell 19% on the day after.

Fast forward to today. Netflix added 4.33M new subs during 4Q14, a deceleration in YoY growth from those “disappointing” 3Q14 sub numbers, but a surprise vs. the company’s more conservative guidance and consensus expectations. Sales were up 26.4%, again a modest deceleration from those awful 3Q14 numbers, but in line with expectations and EPS, at $0.72, were way above both guidance and consensus. The share price? Up 14% after hours. No wonder CEOs hate to give guidance.

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January 14, 2015 – Ten Investible Things That We Think Will Happen in 2015

Written January 14th, 2015 by

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2014 was a relatively quiet year in TMT, with the BABA IPO and the iPhone6 arguably the biggest events for investors. Our 2014 new year’s predictions were more on target than not, with calls for Samsung’s smartphone woes, IP litigation fizzling, deteriorating TV viewership, upside growth in digital ads, the rise of SaaS and the separation of the big 3 IaaS players from the pack all ringing true. Still, AAPL surprised us with the exceptional iPhone6, wireless residential broadband remains an unappreciated future, and S continued to execute like S. We are back with new predictions, listed below, including our top 5 stock picks for 2015: TWTR, TMUS, WDAY, QCOM and AMZN. Our 2014 picks were overwhelmed by the extraordinarily poor performance of S, and while we have certainly taken some risks with this year’s choices, none of them appear to have the potential for an S level disaster.

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December 22, 2014 – Net Neutrality: Treating the Symptoms Rather than the Disease

Written December 22nd, 2014 by

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The debate on net neutrality is poised to intensify as the FCC considers the President’s request to regulate broadband as Title II common carriage and as it evaluates CMCSA’s proposed merger with TWC. We see merit on both sides of the issues as advocates argue past each other from very different premises. Net Neutrality is a Myth – The internet has a long history of companies paying for superior performance, and outlawing the practice would destroy a market feedback loop that, theoretically, drives investment and ensures value to the consumer.  Broadband is a Monopoly – 60% of Americans have no choice, and most of the rest have just 2 choices for broadband service. This concentration has already yielded unusually high prices and poor service quality, and carriers have begun to exert their market power to extract potentially egregious rents from internet content providers. Consequences – Market valuations assume that broadband operators will NOT face constraining regulation or vigorous competition. This is likely true in the next 2-3 years, although it is possible that the FCC will accede to the White House and reclassify broadband. Longer term, rising prices, content throttling outside the paid “fast lane”, and continued poor service and investment, could yield consumer unrest and strengthen support for regulation. Moreover, we continue to believe that wireless could be a viable alternative by the end of the decade. As these outcomes become more likely, the narrative for stocks like CMCSA, TWC, CHTR, VZ and T will turn gloomy.

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December 1, 2014 – Twitter: Black and Blue, but Read All Over

Written December 1st, 2014 by

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Twitter: Black and Blue, but Read All Over

For the past year, TWTR has been whipsawed on the volatility of its monthly active user growth and the revolving door of the company’s management ranks. While many investors are skeptical, the company recently outlined a narrative by which its revenues could rise tenfold in the intermediate term. We believe that the scenario, which relies on doubling its monthly active users, increasing user engagement, boosting ad density and monetizing unregistered users, is conservative. TWTR’s vast unregistered user base will be tapped as the company resolves functional problems in its app design and communications strategy. Moreover, a powerful secular shift toward digital advertising and rich new ad formats will support both higher ad loads and better ad pricing. We are more skeptical on TWTR’s ambitions to monetize unregistered users, but note that the potential to leverage the platform into new products is considerably greater than has been implied by management’s new narrative. Given less intensive infrastructure requirements than either GOOG or FB, we expect TWTR to deliver superior profitability as it gains scale, and project better than 80% GM and 50% EBITDA margins for 2019. Applying a FB like 19x multiple to 2018 revenues and discounting back at a 30% discount rate, reflecting considerable market and execution risk, we believe TWTR shares have more than 100% upside from current prices.

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Quick Thoughts: Qualcomm Analyst Day – Hang On for a Bumpy Ride

Written November 19th, 2014 by

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-       China is a double-edged sword for QCOM – regulators and scofflaws plague QTL, while QCT is successfully competing for Snapdragon and baseband business.

-       Projected device ASP erosion of 9-10% will hit royalties, but will be offset by chipset unit volume growth driven by emerging market smartphone demand

-       QCOM is driving global wireless technology innovation, combining aggressive R&D spend with historical leadership and positioning itself to attack new opportunities.

-       The regulatory and licensing issues will take several quarters to resolve – meanwhile QCOM’s potentially dominant position may be temporarily immaterial to investors.

QCOM’s annual analyst day saw rookie CEO Steve Mollenkopf and his leadership team take the stage to persuade investors of the company’s dominant position in nearly all wireless markets despite headwinds from regulators in China. The company earlier in the day unveiled a new baseband chip pushing the boundaries of LTE-Advanced technology with 450 Mbps speeds in a more power efficient 20-nm package. It also revealed that it is planning on entering the server chip market, with Facebook a likely launch customer deploying QCOM’s ARM based server chips across its webscale data centers. Despite the company’s leading positions across mobile and plans to enter adjacent markets, growth over the next five years is expected to proceed at an 8-10% clip, fairly conservative guidance given the continued growth of smartphones and the likely size of emerging mobile opportunities. The prospect of Chinese regulators levying stiff penalties continues to haunt management and investors with Mollenkopf’s team giving only vague indications progress is being made for a resolution. Still, the company tried to allay China concerns with videos during the interludes between speakers featuring companies like Xiaomi, China Mobile, and foundry SMIC extolling the virtues of their QCOM partnership.

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