2015 Internet trends report

I always look forward to Mary Meeker's Internet Trends presentation. This year's 197 slide blockbuster did not disappoint. I have included some of my favorite slides below.

It shocks me but we now spend 2.8 hours a day on our mobile phones!

Consumer behaviour has changed yet advertisers are still spending on print and under spending on mobile.

Facebook (Whatsapp, Instagram) is dominating the mobile market by usage and time spent.

Even though Facebook is dominant among teens it is becoming less popular. Thankfully they also own Instagram.

Your mobile is officially the remote control of your life.

Chinese e-commerce is showing exponential growth. Alibaba is dominant in the market.

 What's next? Investors are looking at India for next great technology company.

Click through here for the full presentation.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Ebay (EBAY) and Alibaba (BABA) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Disney it's all about movies and no selfie sticks

No selfie sticks. That was the message Disney sent to consumers lining up for rides last week. The signs make it official guests must stow their selfie sticks on rides. A number of rides mainly Space Mountain and Big Thunder Mountain have had to be stopped due to selfie-stick use. Apparently other theme parks have installed metal detectors in lines! Disney is a forward thinking technology company with Sheryl Sandberg of Facebook and Jack Dorsey of Twitter on the board but even Disney have had enough.  All we need to worry about is visitors using drones to take photos!

https://twitter.com/Jaunted/status/565181794467581952/photo/1

When you see the behavior above it all makes sense and comes ahead of the opening of Shanghai Disney Resort scheduled to open sometime next year. There are 330 million income qualified residents within a three hour travel radius of the park hopefully they will have the selfie-stick ban from the get go.

Source: http://mashable.com/2015/05/19/selfie-sticks-disney-world/

For all the talk of selfie sticks the studio performance of Disney is key. A hit movie creates a waterfall effect for the business. A hit movie creates high box office revenues for Disney, it creates demand for toys, Disney can open new rides getting consumers to stay at the park (remember no selfie-sticks on rides) and finally re-monetise shows on Disney TV. If you're a parent they will get your money somewhere! With the new park in Shanghai Disney and the opening of its first Chinese store Disney has the potential to replicate this success in China.

Source: Disney investor presentation

Its interesting to look at Disney's upcoming movie lineup. Their acquisitions of Pixar, Marvel and Lucasfilms (Star Wars) have set them up to dominate the box office for the next few years. The recently released trailer for the upcoming Star Wars movie has already been viewed 52 million times. The releases above are a great leading indicator for the future success of their business. Disney haven't been specific but they will be opening Star Wars themed attractions at Disney. These new rides and the banning of selfie-sticks give families even more reasons to go to Disneyland.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Disney (DIS) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Investing tips from Jeff Bezos and Larry Page

Everyone is always looking for the next great stock tip from hedge fund gurus. But no one seems to bother to analyse the performance of corporate CEOs and how they invest. Warren Buffet's Berkshire Hathaway is the exception but companies like Google and Amazon have been also widely successful investors. How do they allocate capital?

Jeff Bezos mentioned his ideal investment in his latest shareholder letter. No surprise but the ideal investment sounded like Amazon! (See below). An ideal investment has four characteristics. Customers love it, it can grow to a very large size, it has strong returns on capital and its durable in time.

Source: https://www.sec.gov/Archives/edgar/data/1018724/000119312515144741/d895323dex991.htm

When investing Jeff is famous for asking what won't change in the future. For example what won't change in the future is that customers will always love low prices. So Amazon focuses their investments to improve things that won't change ie customers will always love greater selection, faster shipping and lowest prices on their site. In a fast moving world focusing on the fundamentals that won't change has paid off for Amazon and their shareholders.

Google's Larry Page has a simpler approach. Each investment has to pass the toothbrush test. They will invest in a product or company when it has the potential to be used by hundreds of millions of people hopefully twice a day. That sounds like Google to me. I use it much more than my toothbrush! Instead of worrying about capital returns and free cash flows Page takes the long term view and cares about how useful it will be not how much money it is making. Something to think about next time you're brushing your teeth.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Amazon (AMZN) but is long Google (GOOG) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Time Warner the cheapest way to play TV streaming?

Internet television has taken off with Netflix, Amazon and Hulu leading the way. Investors have had less choice with Netflix being the only pure investment choice Hulu is not listed and Amazon streaming comes along with a retail and cloud business (not too bad a problem to have). Netflix has been the default it is bigger than every other cable network in the US with the average user consuming nearly 2 hours of content a day. The release of HBO Now from Time Warner (TWX) gives consumers and investors new options. HBO is the premium TV service but until recently it was only available on cable.

HBO Now will target the 10 million homes with broadband who don't have a cable subscription. There are also 70 million households in the US that pay for cable but do not have HBO. It's an experience you've probably had but as a premium service HBO has been promoted as an add on to the basic cable bundle. According to Fast Magazine the average HBO pay TV bill added up was $130, HBO Now at $15 is a much more compelling offer. It is also a much cheaper option for investors. TWX is a not a pure play internet streaming investment but they are media content owners having Warner Brothers and the Turner network on their team. Both these services have the potential to be integrated into HBO now or in their own app.

 Note Netflix subscribers as of 31st March 2015, HBO December 2014 numbers include Cinemax subscribers.
HBO has around 30 million domestic subscribers  not including Cinemax.

Source: Netflix 10Q and TWX 10K

In the Game of Thrones you win or you die
HBO Now has 2,800 hours of library and output deals with 4 Hollywood movie studios. Including the most popular TV show of all time Game of Thrones. Management have mentioned that their Turner, Cartoon Network and Warner Brothers content could expand online. I'm expecting TWX to integrate all services or at least release separate apps. Warner Brothers has over 80,000 hours of programming include Harry Potter, Lego and Lord of the Rings and releasing Batman versus Superman next year.

http://time.com/3825376/best-movie-streaming-service-netflix-hbo-hulu-amazon/

Netflix wins on range and pricing with a large list of all time classics though I would argue HBO's originals are better quality. Netflix will pick up the slack on movies next year with an agreement with Disney which will include output like the Avengers and Star Wars. While there is a focus on originals approximately 40% of HBO subscribers only watch movies it is the number one reason for subscribing. Last year 14 of the top 25 films were on HBO (see other stats above). They have long term agreements with Warner Brothers (which they own), Fox, Universal and Summit which comes up for renewal in 2017. There is concern over HBO cannibilising themselves but I believe a lot of households are not subscribers because it is marketed as a premium extra service. As a standalone offer I believe it provides great value.

Netflix or HBO? Both
I believe that both services complement each other. It is a case of both rather than either/or currently 85% of Netflix subscribers are also cable subscribers.TV is not a winner take all market there will be plenty of users who subscribe to both. Netflix stands out for its large selection and HBO for its quality original series and movies. The battle will be interesting as Netflix tries to become HBO faster than HBO can become like Netflix. HBO has priced their service at $15 a premium to Netflix's $9.

The risk with TWX and other media companies are declining advertising revenues. Netflix's on demand add free business model is impacting TV advertising and ratings. Advertising is 17% of revenues TWX has the lowest advertising exposure compared to peers.


Investors have a new streaming option

Source: TWX investor day

TWX should see a re-rating of its stock. In the past year it has spun off its publishing business and with the release of HBO Now is giving consumers more access to their content. TWX trades at a 16.5x forward multiple a slight discount to the market. It's earnings have grown in the high teens % over the past 6 years and as above is expected to earn more than $8 a share in 2018 a near doubling of earnings from 2014. We also believe the stock could see a decent re-rating of the multiple as investors look for another way to get exposure to TV internet streaming.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Time Warner (TWX) or Netlfix (NFLX) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

R&D It's not the size that counts but what you do with it

Innovation is the key to business. It's an old technology saying if you can't predict the future then you have to invent it! The only constant is change and we need to change just to keep up. I always thought research and development would be the best way to measure innovation. Yet looking at research and development spend as a % of sales Apple the most innovative company over the past ten years spends very little (see below). Apple's $6 billion R&D pales in comparison to Microsoft's $11.4 billion. Facebook spends just under half Apple's but as % of sales are reinvesting heavily in messaging and virtual reality applications.

Research and Development spend as % of sales

Source: Bloomberg

Surprisingly Apple does not even make the top 20 list on an absolute basis, click
below to enlarge. I never would have though of Volkswagen being the most innovative company.

Source: http://www.strategyand.pwc.com/global/home/what-we-think/innovation1000/top-20-rd-spenders-2014

Thankfully Bernstein released a report last year asking "Do high R&D spenders in tech generate stock outperformance". They found that companies with the lowest spending on R&D tended to out perform the best. Companies that spent up to 17% of sales on R&D outperformed higher spending companies over 1,3,5-10 year periods. Their research showed that stocks in the lowest third of spend have outperformed since 1977 with a 5 year average out performance of nearly 8%. It's a little counter intuitive but large R&D spend does not equate to better stock performance. It's all about scale and productivity. Productivity is harder to measure so we can only judge based on products. Luckily we can look around us to get a better feel on product innovation. How many people do you see with Microsoft phones and tablets compared to Apple products. Don't worry about R&D spend the customer votes on innovation with his wallet.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Apple and Google stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.