Trefis Helps You Understand How a Company's Products Impact Its Stock Price
COMPANY OF THE DAY : FACEBOOK
Facebook's shown some recent improvements including stronger revenue growth in its latest earnings announcement. However this has failed to fuel the stock has uncertainty remains on its monetization effectiveness, especially on its mobile platform.
In a note today we look at the downside risks to our Facebook estimates, which include a weak mobile platform, its strained ties with Zynga and Facebook fatigue.
See Complete Analysis for Facebook
In a note today we look at the downside risks to our Facebook estimates, which include a weak mobile platform, its strained ties with Zynga and Facebook fatigue.
See Complete Analysis for Facebook
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FORECAST OF THE DAY : TRANSOCEAN AVERAGE DAILY REVENUES
Transocean has been realigning its asset mix to focus on ultra-deepwater, and is currently the largest player with around 29 ultra-deepwater rigs. There are around 120 ultra-deepwater rigs worldwide.
Last year, Transocean divested its low-specification jack-up rigs and placed an order for four newbuild ultra-deepwater drillships that will be contracted to Royal Dutch Shell. Transocean's ultra-deepwater rigs have a utilization rate of around 94% and dayrates are typically above $500,000.
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Last year, Transocean divested its low-specification jack-up rigs and placed an order for four newbuild ultra-deepwater drillships that will be contracted to Royal Dutch Shell. Transocean's ultra-deepwater rigs have a utilization rate of around 94% and dayrates are typically above $500,000.
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RECENT ACTIVITY ON TREFIS
Disney's Infinity Could Give New Life To Its Interactive Media Business
Disney (NYSE:DIS) has maintained somewhat strict boundaries among its different franchises, but that is set to change with the launch of Infinity video game platform. Characters from different franchises will be seen intermixing in the same world within the game, and that’s something that might appeal to Disney fans. The company displayed Infinity at E3 (Electronic Entertainment Expo) 2013 to give a final pre-launch look of the game. Infinity has been in the limelight for quite some time now, and it will be interesting to see if the game can turn around Disney’s interactive media business which has been running in losses for the past several quarters.
Nvidia Licenses Its GPU Technology To Accelerate Its Mobile Expansion
Nvidia (NASDAQ:NVDA), a leading Graphics Processing Units (GPUs) developer, made a significant change to its business model yesterday by announcing that it will start licensing its current and future GPU technology as well as rights to its visual computing portfolio to other silicon manufacturers. Nvidia will start by licensing its Kepler architecture which covers a gamut of computing devices from smartphones to supercomputers. Kepler is the platform for currently shipping GeForce, Quadro and Tesla GPUs as well as Nvidia’s next generation Tegra mobile processor (code-named Logan). The company claims that Kepler is its most efficient GPU architecture to date. With Nvidia entering the licensing model, there are now five major GPU Intellectual Property (IP) licencors – ARM Holdings, Imagination, DMP and Vivante. Nvidia’s strategy to license its technology to third parties is in direct contrast to its competitor AMD which stopped its licensing business by selling its GPU IP group to Qualcomm in 2009. Here’s a quick take on the possible benefits and drawbacks of Nvidia’s decision. Advantages The primary advantage of Nvidia licensing its technology is expansion to a larger number of computing devices. The company derives over 50% of its revenues from PC, and in light of a slowdown in the PC market, it has been focusing on expanding its operation in alternate growth markets such as tablets, smartphones and gaming. Despite the success of its Tegra 2 and Tegra 3 processors, the company has been unable to score a high profile design win that can accelerate its progress in the mobile computing domain. Nvidia believes that by licensing its industry leading graphics technology it will be better-positioned to address the rapid change in technology by targeting a wider market. Nvidia’s Tegra technology can reach alternate markets and application that are not currently being targeted by the company. Nvidia’s technology can now also be used by companies that would probably never have used its Tegra chips. Both Apple and Samsung usually use their in-house manufactured chips, but Nvidia can now push these companies to use its GPU technology to outdo each other in the mobile market. Imagination Technologies has licensed its GPU solution to Apple, Intel, Samsung and some other smaller players. Drawbacks The most prominent drawback is Nvidia’s increasing vulnerability to competition from other players. Any silicon vendor licensing Nvidia’s GPU technology will compete against its own Tegra processors which can limit its growth potential. However, Nvidia firmly believes that licensing its technology opens a whole new revenue stream. In the past, Nvidia had licensed its CPU core for Sony’s Playstation 3 which earned it $250 million as additional annual revenue. We have yet to see whether licensing its technology will cannibalize Nvidia’s processor sales. For now we think that opening a new revenue stream is a good strategy for the company’s long-term growth. See our complete analysis for Nvidia Our price estimate of $17.75 for Nvidia is at a premium of over 20% to the current market price. See our complete analysis for Nvidia’s stock
Lowe's Bids For California Hardware Chain Orchard Supply
Home improvement retailer Lowe’s (NYSE:LOW) has bid $205 million in cash to acquire 60 of Orchard Supply Hardware’s (OSH) 91 stores. The latter filed for Chapter 11 bankruptcy protection after being weighed down by years of declining sales, an overcrowded California market and massive debt which it inherited from its parent company Sears Holding Corporation. In addition to giving the cash amount, Lowe’s will also assume responsibility for the payables owed to Orchard’s suppliers. The bid looks like a smart move by Lowe’s to counter competition from Home Depot, the nation’s biggest home improvement retailer, in the lucrative California real estate market. Home Depot has more than twice the number of stores as Lowe’s in California and they are located strategically giving the company better access to consumers. Lowe’s acquisition has yet to go through, and for now it is merely a stalking-horse bidder. This means that Lowe’s offer price will serve as the minimum offer but can still be topped by other bidders. However, according to the terms of the agreement, competing bids should come in at a minimum increment of $12 million to Lowe’s offer.
Adobe's Results Show Its Cloud Services Gaining Traction
Adobe (NASDAQ:ADBE) posted its Q2 earnings on June 18 and showed that its Creative Cloud offering is gaining traction among users. Additionally, the company saw significant growth in its Marketing Cloud initiatives. According to the company, it has over 700k paid subscribers for the Creative Cloud services that generated $356 million annualized recurring revenue (ARR) in Q2. Additionally, Adobe’s Marketing Cloud division’s Q2 revenues grew 17% y-o-y to $230 million. The only significant drop in revenue was reported in LiveCycle and Connect business, which reported $56 million revenues this quarter, down from $61 million last year. The company witnessed good adoption of subscription licenses and increased its end-user subscriptions for enterprise term licenses (ETLA) during the period. The company reported a diluted earnings per share (EPS) of $0.15 on a GAAP-basis and $0.36 on a non-GAAP basis. While the company reported 10% y-o-y decline in revenues to $1.01 billion, its net income declined by 66% y-o-y to $77 million. Due to change in licensing model from perpetual to subscription, Adobe reported an increase in unearned revenue to $691.3 million. We examine some of Adobe’s key drivers below and its outlook for 2013. Check out our complete analysis of Adobe Outlook for Q3 2013 and FY 2013 Adobe has guided for revenues of $0.975-$1.025 billion for Q3 2013. This would lead to Q3 GAAP EPS in the range of $0.10 to $0.16 and Q3 non-GAAP EPS of $0.29 to $0.35. Adobe expects to have over 1.25 million paid Creative Cloud individual and team subscriptions by the end of 2013, and according to our calculations, it means it will need to add over 21.15K paid users per week for the rest of 2013, 50% more than its current weekly subscription rate of 14.4k. This would give the company total annual recurring revenue of approximately $685 million. Additionally, we expect the company to end the year with approximately $800 million of Digital Media ARR at a revenue growth rate of 20% y-o-y, and we expect that its document services ARR will increase to $115 million by the end of 2013. The company also expects the LiveCycle and Connect business to decline further while the Print and Publishing business is expected to remain flat this year. LiveCycle and Connect business will contribute approximately $200 million to revenues in 2013. Adobe expects 2013 revenue of $4.1 billion and EPS of $0.62 on a GAAP basis and $1.45 on a non-GAAP basis. Cloud Subscription Services To Bolster Revenue Of Photoshop and Creative Software Division According to our estimates, the Photoshop and Creative Software division is the biggest of Adobe’s operating segments and makes up approximately 54% of the company’s value. During Q2 2013, this segment generated approximately $670 million in revenues. Recently Adobe abandoned its Creative Suite (CS) entirely to focus its efforts on developing Creative Cloud (CC), which will replace the CS. The company has stated that revenues from its perpetual licensing software will decrease by 2015 and it will continues to sell CS6 to ease the transition to CC. During the past quarter, Adobe reported an increase in adoption of enterprise CC offering through ETLAs and 46% sequential growth in CC’s subscriber base. Creative Cloud added 221k net new subscribers in Q2 2013, up from 153k last quarter. As a result revenue from CC increased by 50% sequentially to $356 million. Additionally, CC now contributes 81% to total revenues of Creative Software division. Acrobat Family Division Adobe Acrobat family is the second largest division at Adobe and makes up 13% of its value. Acrobat family division reported 3% y-o-y decline in revenues to $199.3 million. However, the decline in point product document services revenue were offset by increase in revenue from Acrobat cloud services. During the quarter, revenues from Acrobat Cloud services grew 31% sequentially to $84 million primarily due to increase in ETLAs. Going ahead, we expect document services’ ARR will drive revenue growth in the Acrobat family division. Digital Marketing Division Omniture is Adobe’s third largest division and makes up 10% of its value by our estimates. Adobe acquired Omniture in 2011 and since then has included all of Omniture’s products under its digital marketing cloud division. As a result, Adobe witnessed strong growth in its marketing cloud services in previous years, and this division has emerged as an important driver for revenue growth at Adobe. In Q2 CY13, this division reported a 20% y-o-y increase in revenue to $230 million. Additionally, Adobe Marketing Cloud achieved 25% y-o-y bookings growth in the quarter and the company has guided $1 billion in annual revenue. We expect that as big data analytics, mobility, social media and cloud computing gain more traction across industries, this division will report incremental growth in revenues as it has a portfolio of analytical tools that deal with marketing on social media and mobile. While this division contributed 12.5% to Adobe’s total revenues in 2012, we expect it to increase to 16% by the end of our forecast period. We currently have a $37.50 Trefis price estimate for Adobe, which is 20% below its market price. Understand How a Company’s Products Impact its Stock Price at Trefis
The Boeing And Airbus Dog Fight Heats Up Over Orders At The Paris Air Show
Boeing (NYSE:BA) announced Tuesday the commercial launch of its larger 787 Dreamliner – 787-10 – at the 2013 Paris Air Show. The aircraft manufacturer made the launch announcement with more than 100 order commitments for the 787-10 from airlines across North America, Europe and Asia. This comes barely four days after Airbus undertook the first flight of its wide-body airplane model – the A350 XWB – which is designed to compete with Boeing’s wide-body models – 787 and 777. With these major steps, competition between Boeing and Airbus in the lucrative wide-body commercial airplane segment has increased significantly. In other commercial airplane segments like narrow-body, Boeing’s 737 series already competes neck-to-neck with Airbus’ A320 family of aircraft. At the Paris Air Show, both these players have received multiple orders for their leading narrow-body airplanes. Airbus has also received a mega order worth $8 billion (at list prices) for 20 A380 superjumbos from Doric Lease Corp, a German aircraft leasing company. See our complete analysis of Boeing here . We are currently in the process of updating Boeing’s analysis and model. 787-10′s Launch Counters A350′s First Flight The larger 787-10 with a seating capacity of 300-330 passengers has been launched to take on the larger models of Airbus A350 that seat between 314 and 350 passengers in a three-class seating arrangement depending on the model. In comparison, the smallest 787 version – 787-8 – seats 240 passengers in a three-class seating arrangement and the next larger version – 787-9 – seats 280 passengers in a three-class seating arrangement. The 787-10 is expected to enter service in 2018, compared to the A350-900 which will enter service next year. In terms of noise levels and cost performance, which includes fuel efficiency, both 787 Dreamliner and A350 are top-notch planes. Both are made from carbon composites which makes them lighter and fuel-efficient. While Airbus says that its smallest A350 – A350-800 – is more fuel-efficient than the smallest 787 – 787-8 – with 8% lower operating costs. Boeing’s Commercial Airplanes CEO Ray Conner said yesterday, “ The [largest 787 - ] 787-10 is 25 percent more efficient than airplanes of its size today and more than 10 percent better than anything being offered by the competition for the future. ” All in all, with Airbus A350 making its first flight last week and Boeing announcing the launch of a larger 787, the competition in the wide-body commercial airplane segment has been raised. In terms of orders received so far, the B-787 trumps A350 by a healthy margin. Through May 2013, Boeing received 890 orders for the 787 Dreamliner and delivered 57 of these while Airbus received 613 orders for the A350 and will start making its deliveries from the second-half of next year. 777X Will Compete With The Largest A350 At the same time, Boeing is continuing to work on an upgraded version of the 777, dubbed as 777X, which will take on the largest A350. This plane which is expected to enter markets by the end of the decade will consume 20% less fuel than today’s 777. The company currently plans for two versions of the 777 – 777-8X and 777-9X. The former will seat around 350 passengers while the latter will seat around 400 passengers. The table below compares Boeing’s 787 Dreamliner and 777 series with Airbus’ A350 family of aircraft on seating capacity, maximum flying range, price and entry in-service year. Parameter\Model Boeing 787-8 Boeing 787-9 Airbus A350-800 Airbus A350-900 Boeing 787-10 Airbus A350-1000 Boeing 777-300ER Seating capacity (3-class) 240 280 270 314 300-330 350 386 Entry In-Service 2011 2014 2016 2014 2018 2017 2004 Maximum range 8,200 nmi 8,500 nmi 8,480 nmi 8,100 nmi 7,000 nmi 8,420 nmi 7,930 nmi List Price $206.8 million $243.6 million $245.5 million $277.7 million Not Announced $320.6 million $315 million Through these models, Boeing and Airbus are competing for a lions share of the $2 trillion wide-body commercial airplane market comprising of around 7,950 deliveries over the next two decades. Understand How a Company’s Products Impact its Stock Price at Trefis
A Snapshot of Shutterfly's Business
Shutterfly (NASDAQ:SFLY) is a manufacturer and online retailer of photo-based personalized products and services in the U.S. While the company operates in both the consumer and enterprise segment – the consumer segment represents the dominant part of its business accounting for more than 95% of its overall revenues. The company’s business is seasonal as more than 50% of the overall revenues are recorded in the fourth quarter. Revenue grew by 35% annually and 28% annually in 2012 and Q1 2013 respectively for the company. The growth in the number of customers and orders have been the key drivers for revenue growth in these periods. We expect continued strong growth in Shutterfly’s top line fueled by its inorganic growth strategy, innovation in its product portfolio and partnerships to boost brand awareness. Its operating margin grew to 6.4% in 2012 as compared to 3.3% in the prior year, mainly on account of decrease in sales and marketing costs, and general and administrative expenses as a percentage of revenues. The competitive landscape in Shutterfly’s industry is challenging with multiple competitors across the digital photography industry value chain.
What Is Target Doing To Bolster Future Growth?
Target (NYSE:TGT) is one of the largest retailers in the U.S. with more than 1,700 stores in the region. Its huge presence in the country somewhat limits Target’s growth opportunities, and weakness in the U.S. retail industry has also troubled it. Target’s results were disappointing in the last two quarters due to the weak holiday season, prolonged cold weather and weak consumer spending. To sustain its growth, the company is focusing on its e-commerce channel which has performed relatively well. Target also recently initiated its international operations and is expanding in urban areas (where its presence is limited) in the U.S. with its smaller format CityTarget stores. For its comparable store sales growth, it is relying on its strong product offerings and rewards program to attract more customers.
Google's Waze Deal Will Boost Its Maps Monetization Efforts
Google (NASDAQ:GOOG) has acquired Waze, a social mapping application, for $1.1 billion. While Google Maps is superior in terms of its reach and technology, Waze has caught on with users as it lets them edit maps with relevant social information such as police check post, accidents on road and places to visit. Google had recently overhauled its Google maps application, and this acquisition has further cemented Google’s position in Internet maps vertical. In this article we will analyze Waze’s valuation and also explore why Waze’s acquisition is important for Google. See our complete analysis of Google here How Is Waze Valued? According to Waze’s company blog post, the total user base for Waze has increased from 36 million to 50 million in the last six months. Google has paid $1.1 billion for acquiring Waze, which translates into $22 for each of Waze’s active user. This might seem expensive, but considering that Waze now has access to Google’s marketing spend and global reach, the growth opportunity at Waze is immense. Currently, Waze offers its services in USA and Israel, and in the last six months its user base has increased by 39%, which translates into an annualized growth rate of 77%. If we were to assume that Waze will continue to grow at this rate then its user base can increase to 115 million by 2014 and 200 million by 2015. Additionally, if each Waze user were to visit the application twice in a day, 115 million users can generate nearly 7 billion impressions (page views) in a month. Moreover, we believe that not all the impressions can be monetized as Waze charges only if a business’s pin shows up on its map. We conservatively estimate that only 50% of these impressions can be monetized, and therefore, Waze can generate $60 million revenues per year based on the current $1.50 revenue per 1,000 impressions rate in the U.S. market. At this rate, Google can expect to breakeven in 18 years. However, with Google supporting Waze with its technology and reach, Waze’s application can be launched quickly in untapped markets across different geographies that can result in increase in the number of Waze users. In such a scenario, revenues from Waze can be substantially higher and Google’s investment can be recovered sooner. Google’s Rationale For Acquiring Waze While it is argued that the primary reason for Google’s acquisition of Waze is to keep competitors such as Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) out of the mapping industry, we believe that there is more to this acquisition than meets the eye. Google Map, although very popular amongst users, has limited functionality with only location and mapping services. Google currently monetizes its maps by licensing APIs to websites. Google is testing new methods, such as sponsored map icons on the app and Google ad word searches placed next to Google Map to monetize its app. However, advertisers are apprehensive on spending ad dollars on maps as user engagement is low compared to other venues. With this acquisition, Google can now incorporate social element of Waze into Google Maps. Additionally, Google can also incorporate some of the Waze’s features such as user edited maps that generate real time information on maps and thus increase its user engagement. With increased user engagement, Google can better market and monetize its app to advertisers. Moreover, Google can also incorporate Waze’s user point reward program to encourage users to edit its maps. These rewards point could then be used for shopping across Google shopping and Google Offers platforms, and further increase revenues from cross-selling products. We currently have a $802 price estimate for Google, which is approximately 10% below the current market price. Click Here To Understand What Drives A Stock At Trefis
Singapore's Central Bank Raps 20 Banks For Rates Manipulation
Late last week, the Monetary Authority of Singapore (MAS) announced that as a part of its review of the Singapore Interbank Offered Rates (SIBOR) and Swap Offered Rates (SOR) over 2007-2011, it found 133 instances in which traders at 20 banking giants tried to rig benchmark submissions. The financial regulator promptly asked the banks to deposit additional reserves with it, with each bank having to deposit an amount between S$100 million to S$1.2 billion (~$80 million to $1 billion) based on the extent of its involvement in the wrongdoing. The banks will get their respective amounts back without any interest after a year – the interest lost essentially representing the fines for the banks. The banks are also required to tighten the “deficiencies in the governance, risk management, internal controls, and surveillance systems” to ensure that their employees cannot game the process for short-term benefits. The MAS handed out the fines to banks by placing each of them in one of four groups – with ING, RBS (NYSE:RBS) and UBS (NYSE:UBS) asked to part with the most cash. Bank of America (NYSE:BAC), Barclays (NYSE:BCS), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), Citibank (NYSE:C) and JPMorgan (NYSE:JPM) also figure on the list of banks fined in this manner.
Bullish Investor Sentiment Left Unsupported; Stocks Set to Crash?
Submitted by Emma Davis as part of our contributors program . By Sasha Cekerevac If one were to look at the current state of the stock market, because of the substantial run-up in prices, one would think that investor sentiment is being based on the bullish opinion that corporate earnings will continue to rise. However, a look below the surface would reveal that corporate earnings are not growing anywhere near the levels necessary to sustain the current enthusiasm in investor sentiment. The corporate earnings estimates for the second quarter of 2013 are currently 1.1%, which is a drop of approximately 75% from earlier estimates of 4.3% made by analysts for that quarter. (Source: FactSet, June 14, 2013.) If corporate earnings do come in at 1.1% for the second quarter, while that would be the third consecutive quarter of growth for corporate earnings, eight of 10 sectors will see a decrease in corporate earnings growth. With 86 companies issuing negative guidance for corporate earnings during the second quarter, as opposed to 21 issuing positive guidance, corporate earnings are clearly stagnating. It appears that investor sentiment is far too bullish regarding the underlying fundamentals of the economy. As I mentioned previously, much of the move up in the stock market has not been based purely on corporate earnings growth; rather, the upward momentum has been due to investor sentiment fueled by the Federal Reserve’s aggressive monetary stimulus package. A great example of the dichotomy between investor sentiment and the underlying corporate earnings is the technology sector. Chart courtesy of www.StockCharts.com By looking at the chart of the NASDAQ above, it is obvious that investor sentiment has moved into the bullish camp. However, corporate earnings are telling a different story. According to FactSet Research System Inc. (NYSE/FDS), corporate earnings for the information technology (IT) sector are set to drop by 6.3% during the second quarter. Even after taking Apple Inc. (NASDAQ/AAPL) out of this index, as that company is a large contributor to the drop and will see a sharp decline in its corporate earnings, the technology sector is still set to see a decline in corporate earnings of 3.1%. In fact, corporate earnings for the technology sector have been relatively weak over the past couple of years. Yet looking at the chart of this index, investor sentiment has been extremely bullish. This bullish sentiment is not only in the technology sector, but the market in general, which has led to a valuation for the market above its long-run trends. The market’s current price-to-earnings ratio of 14.2 is higher than both its five- and 10-year averages. If corporate earnings were set to generate high growth rates going forward, then the current level of investor sentiment might be warranted. However, with guidance for many sectors being negative on corporate earnings growth rates, this leads to the conclusion that investor sentiment is fueled primarily by monetary policy. The danger is that this aggressive level of monetary stimulus will not last forever. I think it is highly likely that some form of a reduction in the asset purchase program will be enacted later this fall or early next year; this shift in monetary policy will also bring a shift in investor sentiment, which I believe will lead to a substantial market sell-off. With corporate earnings not growing rapidly, there is very little left to keep investor sentiment bullish later this year. This article Bullish Investor Sentiment Left Unsupported; Stocks Set to Crash? was originally published at Investment Contrarians
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