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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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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