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Is Netflix Dead?

Too far out over their skis.

For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.

Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.

Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.

The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.

The numbers were not even close.

Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.

International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.

The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.

Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.

After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.

The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.

Let's get a little more granular, shall we?

Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."

Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.

Investors smelled a rat.

It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.

That time is now.

UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."

I don't buy it.

Yes, the shares got ahead of itself, but the Netflix narrative is still intact.

Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."

The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.

Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.

The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.

The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.

The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.

Don't worry investors.

These eyeballs are just temporary.

The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.

Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.

Netflix won't be down for long.

Let's briefly review some of Netflix's cornerstone advantages:

The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.

The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.

The first-mover advantage that has allowed Netflix to have its own cake and eat it.

And the competition's laggardly response to Netflix eating its own cake.

Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.

Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.

He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.

Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.

Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.

Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.

Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.

Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.

Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.

The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.

Netflix is aggressively courting Hollywood's A-list and poaching them in droves.

Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.

This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.

Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.

The only way Netflix can be stopped is if it stops itself.

The pipeline is plush, and it is not all priced into the stock yet.

Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.

Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.

CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.

Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.

About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.

Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.

Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.

GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.

That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.

And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?

It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.

The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.

________________________________________________________________________________________________

Quote of the Day

"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.

June 27, 2018

Tech Letter

Mad Hedge Technology Letter
June 27, 2018
Fiat Lux

Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)

Don't Nap on Roku

Tech Letter

Unique assets stand the test of time.

In an era of unprecedented disruption, unique assets' strength begets strength.

This is one of the big reasons the vaunted FANG group has carved out power gains in the business landscape bestowed with a largesse dwarfing any other sector.

As the FANGs trot out to imminent profitability by supercharging massive scale, the emerging tech environment gives food for thought.

These up-and-coming companies fight tooth and nail to elevate themselves to FANG status because of the ease of operating in a duopoly or an outright monopoly.

Microsoft (MSFT) is the closest substitute to an outright FANG. In many ways CEO Satya Nadella has positioned himself better than Facebook (FB) and Apple.

The Mad Hedge Technology Letter has pounced on the newest kids on the block offering subscribers buy, sell or hold recommendations zoning in on the best first and second tier companies in tech land.

The top echelon of the second tier is led by no other than Jack Dorsey and both of his companies, Square (SQ) and Twitter (TWTR), offer idiosyncratic services that cannot be found elsewhere.

I have devoted stories to Dorsey gushing about his ability to build a company and rightly so.

Another solid second tier tech company bringing uniqueness to the table is Roku (ROKU), which I have talked about in glowing terms before when I wrote, "How Roku is Winning the Streaming Wars."

To read the archived story, please click here.

Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.

The word Roku means six in Japanese and it was chosen because Roku was the sixth company established by founder and CEO Anthony Wood commencing in 2002.

Cord-cutting has been a much-covered topic in my newsletters and this generational shift in consumer behavior benefits Roku the most.

In 2017, 25% of televisions purchased were Roku TVs. According to several reports, more than half of all streaming players purchased last year were Roku players.

This would explain how Roku has shifted its income streams from the physical box itself to selling ads and licensing agreements.

Yes, Roku earns the lion's share of its profits similar to the rogue ad seller Facebook.

Roku does not actually sell anything physical except the box you need to operate Roku, which earned Roku a fixed $30 per unit.

The box serves as the gateway to its platform where it sells ads. Migrating to higher caliber digital businesses like selling ads will stunt the hardware revenue part of its business.

That is all part of the plan.

A new survey conducted regarding fresh cord-cutters demonstrated that out of 2,000 cord-cutters questioned, 70% already had a Roku player and felt no need to pay for cable TV anymore.

Second on the list was Amazon Fire TV at 34%, and Apple TV (AAPL) came in third at 10%.

The dominant position has forced content creators to pander toward Roku TV's platform because third-party content creators do not want to miss out on a huge swath of cord-cutter millennials who are entering into their peak spending years and spend most of their time parked on Roku's platform.

Surveys have shown that millennials do not need a million different streaming services.

They only choose one or two for main functionality, and in most cases, these are Netflix (NFLX) and Amazon (AMZN).

Roku allows both these services to be integrated onto its platform. Cord-cutters can supplement their Netflix and Amazon Prime Video binge with a few more a la carte channels to their preference depending on points of interest.

In general, this is how millennials are setting up their entertainment routine, and all roads don't lead through Rome, but Roku.

If the massive scale continues at this pace, 2020 could be the year profitability explodes through the roof.

The next 18 months should give way to parabolic spikes, followed by consolidation to higher lows in the share price.

When I recommended this stock, its shares were trading at a tad above $32 on April 18, 2018, and immediately spiked to $47 on June 20, 2018.

The tariff sell-off hit most second tier tech companies flush in the mouth. The 5% and occasional 7% intraday sell-offs churn the stomach like Mumbai street food during the height of the Indian summer.

That is part and parcel of dipping your toe into these rising stars.

The move ups are parabolic, but the sell-offs make your hair fall out.

Well, glue your locks back onto your scalp, because we have reached another entry point.

Roku is now trading back down in the low $40 range, and I would bet my retirement fund that Roku will end the year above $50.

This unique company is expected to grow its subscriber base by at least 20% annually, and in five years total subscribers will eclipse 45 million users.

Reinforcing its industry leadership, traditional media companies such as Disney and CBS do not have built-in streaming viewership that comes close to touching Roku.

This has forced these traditional media giants to push their content through Roku or lose a huge amount of the 18 to 34 age bracket for which advertisers yearn.

These traditional players are armed with robust ad budgets, and a good bulk of it is allocated to Roku among others.

For each additional a la carte channel users sign up for on Roku, the company earns a sales commission.

As a tidal wave of niche streaming channels plan to hit the market, the first place they will look to is Roku's platform and this trend will only become stronger with time.

A prominent example was Sling TV, which showed up at Roku's front door first before circling around the rest of the neighborhood.

The runway for Roku's three main businesses of video ads, display ads, and licensing with streaming partners, is long and robust.

The one caveat is the fierce competition from Amazon Fire TV, which puts its in-house content on Amazon front and center when you start the experience.

Roku has head and shoulders above the biggest library of content, and the Amazon effect could scare traditional media for licensing content to Amazon.

We have seen the trend of major players removing their content from streamers because of the inherent conflict of interests licensing content to them while they are developing an in-house business.

It makes no sense to voluntarily offer an advantage to competition.

Roku has no plans to initiate its own in-house original content, and this is the main reason that Amazon and Netflix will lose out on Disney (DIS), CBS (CBS), NBC, and Fox content going forward.

These traditional players categorize Roku as a partner and not a foe.

To get into bed with the traditional media giants means digital ads and lots of them. In terms of a user experience, the absence of ads on Netflix and Amazon is a huge positive for the consumer experience.

But traditional players have the option of bundling ads and content together on Roku making Roku even more of a diamond in the rough.

In short, nobody offers the type of supreme aggregator experience, deep penetration of cord-cutting viewership, and the best streaming content on one graphic interface like Roku.

It is truly an innovative company, and it is in the driver's seat to this magnificent growth story.

It's hard to argue with CEO Anthony Wood when he says that Roku is the future of TV.

He might be right.

If Roku keeps pushing the envelope enhancing its product, it will be front and center as a potential takeover target by a bigger tech company.

Either way, the scarcity value of these types of assets will drive its share prices to the moon, just avoid the nasty sell-offs.

_________________________________________________________________________________________________

Quote of the Day

"Google's not a real company. It's a house of cards," - said former CEO of Microsoft Steve Ballmer.

June 21, 2018

Tech Letter

Mad Hedge Technology Letter
June 21, 2018
Fiat Lux

Featured Trade:
(WHY NETFLIX IS UNSTOPPABLE),
(NFLX), (CAT), (AMZN), (CMCSA), (DIS), (FOX), (TWX), (GM), (WMT), (TGT)

Why Netflix is Unstoppable

Tech Letter

Trade war? What trade war?

Apparently, nobody told Netflix (NFLX) that we are smack dab in a tit-for-tat trade war between two of the greatest economic powers to grace mankind.

No matter rain or shine, Netflix keeps powering on to new highs.

The Mad Hedge Technology Letter first recommended this stock on April 23, 2018, when I published the story "How Netflix Can Double Again," (click here for the link) and at that time, shares were hovering at $334.

Since, then it's off to the races, clocking in at more than $413 as of today, a sweet 19% uptick since my recommendation.

It seems the harder I try, the luckier I get.

What separates the fool's gold from the real yellow bullion are challenging market days like yesterday.

The administration announced a new set of tariffs on $200 billion worth of Chinese imports.

The day began early on the Shanghai exchange dropping a cringeworthy 3.8%.

The Hong Kong Hang Seng Market didn't fare much better cratering 2.78%.

Investors were waiting for the sky to drop when the minutes counted down to the open in New York and futures were down big premarket.

Just as expected, the Dow Jones Index plummeted on the open, and in a flash the Dow was down 410 points intraday.

The risk off appetite toyed with traders' nerves and American companies with substantial China exposure being rocked the hardest such as Caterpillar (CAT).

After the Dow hit an intraday low, a funny thing happened.

The truth revealed itself and U.S. equities reacted in a way that epitomizes the nine-year bull market.

Tar and feather a stock as much as you want and if the stock keeps going up, it's a keeper.

Not only a keeper, but an undisputable bullish signal to keep you from developing sleep apnea.

In the eye of the storm, Netflix closed the day up a breathtaking 3.73%. The overspill of momentum continued with Netflix up another 2% and change today.

This company is the stuff of legends and reasons to buy them are legion.

As subscriber surveys flow onto analysts' desks, Netflix is the recipient of a cascade of upgrades from sell side analysts scurrying to raise targets.

Analysts cannot raise their targets fast enough as Netflix's price action goes from strength to hyper-strength.

Chip stocks have the opposite problem when surveys, portraying an inaccurate picture of the 30,000-foot view, prod analysts to downgrade the whole sector.

That is why they are analysts, and most financial analysts these days are sacked in the morning because they don't understand the big picture.

Quality always trumps quantity. Period.

Netflix has stockpiled consecutive premium shows from titles such as Stranger Things, The Crown, Unbreakable Kimmy Schmidt, and Orange is the New Black.

This is in line with Netflix's policy to spend more on non-sports content than any other competitors in the online streaming space.

In 2017, Netflix ponied up $6.3 billion for content and followed that up in 2018, with a budget of $8 billion to produce original in-house shows.

Netflix hopes to increase the share of original content to 50%, decoupling its reliance on traditional media stalwarts who hate Netflix's guts with a passion.

A good portion of this generous budget will be deployed to make 30 new anime shows and 80 new original films all debuting by the end of 2018.

Amazon's (AMZN) Manchester by the Sea harvested two Oscars for its screenplay and Casey Affleck's performance, foreshadowing the opportunity for Netflix to win awards next time around, potentially boosting its industry profile.

It will only be a matter of time because of the high quality of production.

Netflix's content budget will dwarf traditional media companies by 2019, creating more breathing room against the competitors who have been late to the party and scrambling for scraps.

This is what Disney's futile attempts to take on Netflix, which raised its offer for Fox to $71.3 billion to galvanize its content business.

Disney's (DIS) bid came on the heels of Comcast Corp. (CMCSA) bid for Disney at $65 billion.

The sellers' market has boosted all content assets across the board.

Remember, content is king in this day and age.

In 2017, Time Warner (TWX) and Fox (FOX) spent $8 billion each and Disney slightly lagged with a $7.8 billion spend on non-sports programming.

Netflix will certainly announce a sweetened content outlay of somewhere close to $9.5 billion next year attracting the best and brightest to don the studios of Netflix.

What's the whole point of creating the best content?

It lures in the most eyeballs.

Subscriber growth has been nothing short of spectacular.

Expectations were elevated, and Netflix delivered in spades last quarter adding quarterly total subscribers to the tune of 7.41 million versus the 6.5 million expected by analysts.

Not only a beat, but a blowout of epic proportions.

Inside the numbers, rumors were adrift of Netflix's domestic numbers stagnating.

Consensus was proved wrong again, with domestic subscribers surging to 1.96 million versus the 1.48 million expected.

The cycle replays itself over. Lather, rinse, repeat.

Quality content attracts a wave of new subscribers. Robust subscriber growth fuels more spending, which paves the way for more quality content.

This is Netflix's secret formula to success.

Netflix has executed this strategy systemically to the aghast of traditional media companies that are stuck with legacy businesses dragging them down and making it decisively difficult to compete with the nimble online streaming players.

Turning around a legacy business is tough work because investors expect profits and curse the ends of the earth if companies spend big on new projects removing the prospects of dividend hikes.

Netflix and the tech darlings usually don't make a profit but have a license to spend, spend, and spend some more because investors are on board with a specific narrative prioritizing market share and posting rapid growth.

The cherry on top is the booming secular story happening as we speak in Silicon Valley.

Effectively, all other sectors that are not tech have become legacy sectors thanks in large part to the high degree of innovation and cross-functionality of big cap tech companies.

The future legacy winners are the legacy stocks and sectors reinventing themselves as new tech players such as General Motors (GM), Walmart (WMT), and Target (TGT).

The rest will die a miserably and excruciatingly slow death.

The Game of Thrones M&A battle with the traditional media companies is a cry of desperate search for these dinosaurs.

They were too late to react to the Netflix threat and were punished to full effect.

Halcyon days are upon Netflix, and this company controls its own destiny in the streaming wars and online streaming content industry.

As history shows, nobody executes better than CEO Reed Hastings at Netflix, which is why Netflix maintains its grade as a top 3 stock in the eyes of the Mad Hedge Technology Letter.

_________________________________________________________________________________________________

Quote of the Day

"I got the idea for Netflix after my company was acquired. I had a big late fee for Apollo 13. It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault," - said cofounder and CEO of Netflix Reed Hastings.

April 19, 2018

Tech Letter

Mad Hedge Technology Letter
April 19, 2018
Fiat Lux

Featured Trade:
(HOW ROKU IS WINNING THE STREAMING WARS),
(ROKU), (FB), (AMZN), (NFLX), (GOOGL), (BBY), (DIS)

How Roku is Winning the Streaming Wars

Tech Letter

The whole digital ad industry dodged a bullet.

Facebook (FB) CEO Mark Zuckerberg's wizardry on Capitol Hill will stave off the data regulation hyenas for the time being.

One company in particular is perfectly placed to reap the benefits.

The Facebook of online streaming - Roku (ROKU).

Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.

The company has two foundational drivers propelling business - selling hardware devices and selling digital ads.

It pays dividends to be entrenched at the intersection of two monumental generational trends of cord cutters' mass migration to online streaming, and the disruption of the digital ad revolution that is shaking up traditional media giants.

The percentage of American homes paying for an online streaming service ripped higher to 55% of households, which is up from 49% the previous year.

This $2.1 billion per month spend on streaming service is specifically as a result of access to premium content at an affordable price relative to traditional cable bundles.

Roku is a microcosm of the healthy climate for quality technology stocks in 2018.

It is among countless other firms that leverage large-scale data or cloud tools to capture profits.

Roku is best of breed of smart TV platforms and is in the early stages of robust growth.

This year will be the first year Roku's ad revenue surpasses hardware sales, indicating strong platform growth.

Roku pinpointed building account user growth, top-line gross revenue, and enhancing the platform capabilities as ways to move the business forward.

This year will also be the first year Roku posts an overall profit.

Active accounts grew 44% YOY to 19.3 million.

Roku offers consumers a cheap point of entry selling its Roku express box for only $29.99.

Its device is even free with a two-month purchase of Sling TV, which is the best online substitute to a legacy cable package. It has two sets of unique bundles available, charging $20 per month and $40 per month.

Once the Roku home screen populates, users can choose content through a la carte streaming options.

There is no monthly fee to operate Roku, and the device is used primarily by millennials.

More than 60% of 18- to 29-year-olds watch TV from online streaming, according to a Pew survey.

The quality and easy-to-use interface aids user navigation across the ecosystem.

It's the most convenient avenue to subscribe to multiple online streaming services all on one platform. It entices finicky users with extra mobility - those who love to jump around to different services based on particular upcoming content loaded up in the pipeline.

Many of these services offer no contract, cancel-anytime models that millennials love rather than the "old-school" rigid rules of cable providers that mostly charge a cancellation penalty of $300.

It is shocking how far traditional media fell behind the curve, but they are in rapid catch-up mode now.

Remember that content is king, and the overall boost in content quality has really shaken Hollywood executives to their core.

The golden age of streaming continues unabated with a Netflix 2018 annual content budget of $8 billion.

Roku does not create original content and it desires no skin in the game.

Content is expensive, and Roku would rather become the best place to host it.

Netflix's 2017 total revenue was a staggering $11.69 billion in 2017, and content costs will easily surpass 50% of total revenue in 2018. Overnight, it has become one of the biggest players in Hollywood, as its presence at the Emmy Awards amply demonstrates.

Exorbitant content costs are the new normal in 2018, and Spotify has reason to moan about the cost of content being 79% of total revenue.

Heightened content costs are the main reason why firms relying on content creation lose money each year.

However, as the overall pie grows, there is room for the tide to lift all boats. Being the premier platform to host premium content is why Roku's business model is eerily similar to Facebook's hyper-targeting ad model.

They make money the same way.

The incessant demand for online streaming functionality and smart TV operating systems show no signs of waning with Amazon (AMZN) announcing a new partnership with frenemy Best Buy (BBY) to produce smart TVs with Best Buy's in-house TV brand Insignia.

This is the first time Best Buy has been afforded a direct route to Amazon customers.

Disney (DIS) is turning around its legacy company into an online streaming behemoth announcing its first foray into online streaming with ESPN+.

Disney has tripled down on online streaming, acquiring New York-based BAMTech in late 2017, a company focused on developing streaming technology and made famous by its production of pro baseball's MLB TV.

BAMTech exudes pure quality. Anyone who has used MLB TV streaming service understands the great end-product it offers consumers.

The outstanding success with MLB TV attracted new online streaming converts to BAMTech to execute the transition to online streaming, including the WWE, Fox Sports, PlayStation Vue, and Hulu.

HBO went to BAMTech in 2014, after botching its attempt at creating a reliable stand-alone streaming service.

Disney's BAMTech-produced online streaming service will come to market in 2019, and will certainly be available on Roku TV.

Expect new blockbuster hits to debut on this new streaming service, such as new versions of Star Wars.

It is the perfect stock to mutate into an online streaming service because it possesses amazing content especially through ESPN.

The announcement of ESPN+ levitated Roku shares by 10% because investors understand this is the first baby step to shifting more of its content online.

This was on top of the announcement that Stephen A. Cohen's Point72 Asset Management had acquired a 5.1% stake in Roku for about $14 billion.

Furthermore, every major streaming service that enters Roku's system is worth an extra 5% to 10% bump in share price because of the wave of eyeballs and digital ads that grow Roku's coffers.

It is certain that 2018 and 2019 will sway more cord cutters to adopt Roku TV as this cohort approaches 70 million in 2018 on its way to 80 million in 2019.

The critical growth lever is its digital ad business as it hopes to take home a slice of this $70 billion per year business that is 75% controlled by Alphabet (GOOGL) and Facebook.

Roku has made great strides with half of Ad Age's top 200 advertisers already on the Roku interface.

Roku is taking the playbook right out from under Facebook's nose, piling funds into further enhancing its ad-tech division.

The blood, sweat, and tears shed is showing up in the financials with ARPU (Average Revenue per User) rocketing by 48% YOY, and more than 65% of this gap up is attributed to digital ad revenue.

Total revenue was up 29% YOY to $513 million, and platform revenue grew 129% in Q4 2017 to $85.4 million.

It is estimated that ad revenue will surpass $300 million in 2018, up from around $200 million in 2017.

Roku expects total revenue to grow 32% in 2018, approaching $700 million.

Profit margins are thriving under the platform segment, pumping out a stellar 74.6% in gross margin.

Roku does not make money on the hardware. Its push into ad distribution will ramp up as its digital ad revenue beelines toward an expected $700 million windfall by 2020.

Roku has a fantastic growth trajectory relative to other tech companies. Heightened volatility will make sell-offs hard to swallow but give fabulous entry points into a budding business.

The fertile path of international user adoption has barely scratched the surface. However, Netflix's successful foray abroad will inject confidence that Roku will have no problem expanding to greener pastures overseas as domestic account growth is always first to mature.

__________________________________________________________________________________________________

Quote of the Day

"AI is one of the most important things humanity is working on. It is more profound than electricity or fire." - said Google CEO Sundar Pichai

Switching From Growth to Value

Diary, Newsletter, Research

All good things must come to an end.

For most of 2015, growth stocks far and away have been the outstanding performers in the US stock market.

Almost daily, I delighted in sending you trade alerts to buy winners, like Palo Alto Networks (PANW), Tesla (TSLA), and the Russell 2000 (IWM).

And so they delivered.

The reasons for their impressive gains were crystal clear.

The expectation all year was that the Federal Reserve would raise interest rates imminently. This gave us a perennially strong dollar (UUP).

Thus, one could only direct focus towards companies that were immune from plunging foreign currencies and falling international earnings.

It really was a year to ?Buy American?.

But a funny thing happened on the way to the bear market for bonds. It never showed up.

The final nail in the coffin was Fed governor Janet Yellen?s failure to move on September 17. She looked everywhere for inflation, but only found the chronically unemployed (the 10% U-6 discouraged worker jobless rate).

Not only did we NOT get the rate hike, the prospects are that WE MAY NOT SEE A SUBSTANTIAL INCREASE IN THE COST OF MONEY FOR YEARS!

At this point, the worst-case scenario is for the Fed to deliver only two 25-basis point rises over the next six months, AND THAT?S IT!

This reinforces my belief that the top of the coming interest rate cycle may only reach the bottom of past cycles, since deflation is so pernicious, and so structural.

All of a sudden, the bull case for the dollar, which has been driving our US stock selection all year, went wobbly at the knees.

Europe, Japan, and China are all now in between new quantitative easing and stimulus cycles, giving a decided bud to the Euro (FXE), the Yen (FXY), (YCS), the Yuan (CYB), the Aussie (FXA), and the Loonie (FXC).

New round of QE will come, but those could be months off.

Therefore, I am sensing a sea change in the market leadership. Rushing to the fore are the shares of companies that benefit from flat interest rates and a flagging greenback.

Those would be value stocks.

Value stocks are easy to find. Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them. This is what the big boys do.

There is another reason to refocus on value stocks, but it is more psychological than analytical.

We are now into our sixth year in this bull market, one of the strongest in history. Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000.

At least if they buy cheap share at market highs they have adequate job preserving explanations for their actions. There is also some inherent built in safety in increasing weightings in companies that haven?t appreciated very much.

I probably don?t know you personally (although I call about 1,000 of you a year), but I bet you don?t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.

So let me do the heavy lifting for you. I?ll distill down the value play to a handful of high quality, high probability sectors.

1) Industrials ? Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years? With global businesses and hefty borrowing for capital spending, they do very well in a flat interest rate environment. What?s my favorite industrial? The former hedge fund that made light bulbs, General Electric (GE). They make really cool jet engines and diesel electric locomotives too.

2) Consumer Discretionary ? Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall. A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades. Low rates will keep the 30-year mortgage under 4% for longer. You already know my best names here, Home Depot (HD), and Disney (DIS).

3) Old Technology ? Tired of paying 100 plus multiples for the latest non yielding cloud highflyer? Mature old technology stocks offer some of the cheapest valuations in the market. As, yes, they pay dividends now! I?ll go with Microsoft here (MSFT) as the action in the options market has suddenly seen a big spike.

And what about the biggest old tech stock of all, Apple (AAPL)? I think this will be a 2016 story, and investors reposition themselves to take advantage of the run up to the iPhone 7 launch in a year. But as the recent price action shows, some portfolio managers may not want to wait.

4) Financials ? Are not the first sector to leap to mind when looking for a low interest rate play. Overnight interest rates will remain depressed as far as the eye can see. However, rates at the long end, maturities of five years or more, are rising.

This steepening yield curve is where it really matters for banks, as it allows them to expand their profit margins. On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value. Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).

New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into the end of 2015. It could take us right to the low end of my forecast yearend range for the S&P 500 I made on January 6 of 2,200-2,300 (click here for ?My 2015 Annual Asset Class Review?).

After five months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure. As a result this underperforming year has ?chase? written all over it.

Keep your fingers crossed, but stranger things have happened.