TMT

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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Quick Thoughts: TWTR – BOOM! There’s MAUs in Them Thar Tweets

Written February 5th, 2015 by

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-     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.

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February 3, 2015 – Advertising: The “Golden Age” of TV Enters its Golden Years

Written February 3rd, 2015 by

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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.

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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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