To date the majority of conversation around 5G mobile network deployments has been in the U.S., as once again Verizon and AT&T battle over whose network will be the best. In the past, the eurozone has blazed the next generation of mobile technology due in part to both Ericsson and Nokia being housed there.
But that is about to change as several mobile operators in the eurozone fire their own 5G cannons with initial network deployments and data plans. While the 5G networks will be a work in progress for some time, the data plans will be something to watch as the carriers balance winning 5G subscribers vs. recouping the spectrum acquisition as well as network buildout costs.
Given the growing pervasiveness of unlimited data plans, we’ll be looking to see how network operators price their 5G offerings, and which solutions stick. As this aspect of our Digital Infrastructure investing theme gets built out, our suspicion is the near unquenchable thirst for data consumption that is part of our Digital Lifestyle investing theme will go swallow up 5G data speeds without missing a beat.
Europe may have lagged behind the United States and South Korea in early 5G network launches due to regulatory hurdles, but top carriers are now making up for lost time with aggressive moves across the continent. In Germany, Deutsche Telekom unexpectedly commenced commercial 5G service in two cities today, while rival Vodafone announced unlimited 4G/5G service plans for the United Kingdom, including 5G roaming across the U.K., Germany, Italy, and Spain.
In Deutsche Telekom’s case, the carrier has opted to open 5G test networks in Berlin and Bonn to consumers today, with a promise to add four more cities in 2019, and cover 20 by the end of 2020.
The move comes only weeks after the carrier spent $2.45 billion in a German 5G spectrum auction and a year after it first began to publicly complain about the high costs of 5G deployment — the reason its unlimited 5G plan will cost €85 ($96) per month with voice service, or €75 ($85) monthly for hotspot-only data service. Initial service is being focused on dense metropolitan areas, but the carrier plans to “eliminate white spots in rural areas” and build 5G networks for campuses, amongst other expansions of its coverage.
Meanwhile, Vodafone has built upon its earlier promise to launch 5G on July 3, becoming the first U.K. operator to promise unlimited 4G and 5G data plans. For the first week of service, Vodafone is offering 5G along with data-capped plans, but starting July 10 the carrier will offer three unlimited data plans at prices from £23 to £30, differentiated by speed. The lowest-end plan, Vodafone Unlimited Lite, will be capped at a meager 2Mbps, while a £26 Unlimited plan will offer 10Mbps speeds, and the high-end Unlimited Max plan will hit “speeds as fast as the device and the network will allow,” peaking at 100 times faster than its current LTE network.
“[W]ith 5G, the demand for data is only set to increase,” explained Vodafone UK CEO Nick Jeffery. “That is why we want to remove the limits on data, so that customers can unlock the full potential of 5G and we can really propel the U.K. into the digital age. By offering unlimited plans to our consumer and business customers, we will revolutionize the market.”
On this episode of the Thematic Signals podcast, Tematica’s Chris Versace digs into why investors should be watching in the month of July. Between the June quarter earnings season, the Fed and the latest economic data, there is no shortage of things investors need to watch. In Chris’s view that’s especially true given the potential for the Fed to NOT cut interest rates at its July monetary policy meeting, and for earnings guidance to be softer than Wall Street is expecting. We’ve also got several thematic signals, including ones for our Digital Lifestyle, Aging of the Population and the new Cleaner Living Index. If you listen carefully, Chris mentions not only one of his favorite companies for the second half of the year, but also how the Cleaner Living signal ties into the Tematica Research Cleaner Living Index.
As we get ready to enter the second half of 2019, we will see several streaming video services launching, including the high profile ones from Disney and Apple, with more to follow in the coming quarters. No surprise as consumers flock to that aspect of our Digital Lifestyle investing theme, preferring to watch what they want, when they want on the device they want.
The question we are thinking through is how long until we see the once quality content filled streaming services become the new cable – filled with subpar programming and in some cases ads?
It seems every week there is a new streaming video service with recent ones including the ability to watch Broadway shows and short-form programming. An example of the latter is Quibi by Jeffrey Katzenberg, one of the former Disney Hollywood wonders, and in a world of other streaming services as well as short-form videos from Snap, Twitter, Facebook and Instagram, the Tematica jury is out on its success.
What’s interesting in the price point at $7.99 for an ad-free subscription, which is less than the $6.99 starting price for Disney+. That same $6.99 starting price was one of the factors that led Comcast to rethink its own streaming service in favor of selling its stake in Hulu to Disney.
The bottom line is we’ve seen these rushes in the past, and invariably there is a shakeout that will washout a number of entrants looking to capitalize on the trend.
Quibi, the short-form video platform founded by Jeffrey Katzenberg, hasn’t even launched, but has already booked $100 million in advertising sales, according to a report from The WSJ this morning. The company, which aims to cater to younger viewers with premium content chopped up into “quick bites,” says it has already booked advertisers, including Protector & Gamble, Pepsi Co., Anheuser-Busch InBev, Walmart, Progressive and Google.
It still has around $50 million in unsold ad inventory ahead of launch.
It’s hard to imagine how a service like Quibi will compete in a market dominated by paid streamers like Netflix and free services like YouTube — both preferred by a younger demographic. But Quibi has been raising massive amounts of money to take them on. In May, it was reported that Quibi was going after another billion in funding, on top of the billion it had already raised.
Beyond the industry’s big bet on Katzenberg himself, Quibi has booked big-name talent, including Steven Spielberg and Guillermo del Toro, and is filming a show about Snapchat’s founding, which may draw in millennial viewers.
But it sounds like Quibi may also be relying on gimmicks — like Spielberg’s horror series that you can only watch at night (when it’s dark outside). Not to mention the very idea that Quibi thinks it’s invented a new kind of media that falls between today’s short-form and traditional TV-length or movie-length content found elsewhere.
On Quibi, shows are meant to be watched on the go, through segments that are around 7 to 10 minutes long. Some of the content will be bigger, more premium productions, while others will be more akin to what you’d find on cable TV or lower-cost daily news programming.
The service will launch April 6, 2020 with two tiers. A $4.99 per month plan includes a pre-roll ad before each video segment. The ad is 10 seconds if the video is less than 5 minutes, and it’s 15 seconds for any videos between 5 and 10 minutes. Some ads themselves will tell “brand stories” throughout the program breaks.
A $7.99 per month tier offers an ad-free experience.
As consumers continue to shift to digital shopping, a key stool in our Digital Lifestyle investing theme, we are not only seeing more companies embrace the direct to consumer (D2C) business model, but we are also seeing more digital shopping solutions for those companies come to market. Internet shopping platform company Shopify is doing just that as it expands its reach into our Digital Infrastructure investing theme by moving into distribution and fulfillment services. Interesting indeed, but what caught our eye is how they are using machine learning, an aspect of our Disruptive Innovators theme, to do so.
E-commerce technology company Shopify Inc. is extending into physical distribution, offering customers access to a network of dedicated U.S. fulfillment centers to store and ship consumer goods for online orders.
The aim is to speed up delivery for retailers racing to keep up with Amazon.com Inc. while keeping a lid on transport costs by placing inventory across a distributed network within easy reach of major population centers.
Ottawa-based Shopify provides internet shopping platforms and other services that help companies sell items online. It has also branched into payment technology and hardware for use at retail stores and pop-up locations as more online businesses open bricks-and-mortar locations. Its customers include Unilever PLC, Kylie Cosmetics and footwear maker Allbirds Inc.
Shopify said Wednesday that its new service uses machine learning to forecast demand, allocate inventory and route orders to the closest fulfillment centers. The company is working with logistics providers and software companies in Nevada, California, Texas, Georgia, New Jersey, Ohio and Pennsylvania.
“Our aim is to make fast and inexpensive shipping the new standard on the internet,” said Shopify Chief Product Officer Craig Miller.
The services are part of a growing array of operations that startups and traditional shipping companies have launched to compete with Amazon’s expanding distribution system, including a Fulfillment by Amazon business that ties its online marketplace for third-party sellers to its burgeoning network of distribution centers and transportation options.
It’s long been thought that you leave home with four things – keys, money, wallet and your phone. Over time that thought process has shifted due to digital locks and payment systems to just your wallet and phone. We here at Tematica have been wondering for some time when personal identification, be it an identity card, drivers license, or passport, would become digitized and stored on our smartphone.
It would seem that day is finally approaching, but as with other forays into our Digital Lifestyle investing theme, we will likely see an added identify management tailwind for our Safety & Security theme as well
The Federal Ministry of the Interior has announced that it will be possible to scan German ID cards with an iPhone running iOS 13.
Apple originally locked the NFC reader in iPhones so that it only supported the data format for contactless payment cards, limiting use to Apple Pay. With iOS 13, Apple is removing that restriction, so that iPhones fitted with the chip will have the technical ability to read any NFC chip.
Apple still needs to approve apps on a case-by-case basis, but the existing precedents mean we can expect it to approve all official government apps for passports and ID cards. Any country that wants to be able to offer this capability to its citizens will be able to do so.
Macerkopf reported the news from Germany, noting that this will make it easier for German citizens to verify their identity online, as well as using the virtual card at airports.
Poshmark is a company that from the get to has embraced the digital shopping aspect of our Digital Lifestyle investing theme, enabled consumers to both earn additional income as they monetize their closets and score fashionable finds at favorable prices versus buying them new off the store rack. Over the years, we’ve had the company on the Tematica Podcast and we’re not surprised Poshmark is following in Amazon’s footsteps to take its business model into new markets.
In this case, Poshmark is starting with home décor, a robust and sizable market. What’s rather interesting is this is one of the most requested areas from Poshmark’s user base. While this could help ensure at least some modest success, the user base can also help direct Poshmark into other lucrative areas as well. As this happens, this is likely to lead Poshmark to become a digital shopping platform rather than a company that helps consumers monetize their closets.
The retail resale platform has entered the estimated $582 billion home décor market with the launch of Home Market, a marketplace where shoppers and sellers can buy and list a wide selection of home decor products, ranging from wall art, bedding and bath to party supplies, holiday and storage. Calling home goods one of the most highly requested categories from its community, Poshmark said that this is the first time it has expandedinventory beyond fashion and makeup.
Poshmark, which was founded in 2011,launched Posh Markets in 2018, which are designed to provide an easier (and more immersive) way for its community of 50 million registered users to tap into the categories featured on its site. Home Market is the latest in a series of Market launches and joins such other Poshmarket marketsWomen, Men, Kids, and Boutique, where users can browse featured listings presented in an Instagram-like feed. Describing itself a platform for “social commerce,”Postmark users are encouraged to leave comments under listings and talk among themselves about listings.
In expanding into home décor, Poshmark will be going up against online home décor sites such as Wayfair as well as such newer players as Rent the Runway which, in a partnership with West Elm, recently started renting home goods.
The G20 meeting will set the stage for what the Fed does next
Earnings expectations have yet to follow GDP expectations lower
We are implementing a $340 stop loss on Digital Lifestyle Thematic Leader Netflix (NFLX).
Over the last few days several economic data points have reinforced the view that the domestic economy is slowing. Meanwhile, the continued back and forth on the trade front, between the U.S. and China as well as Mexico, has been playing out.
What has really captured investors’ focus, however, is the Federal Reserve and the comments earlier this week from Fed Chair Jerome Powell that the Fed is monitoring the fallout from trade issues and eyeing the speed of the economy. Powell said the Fed will “act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
This has led to a pronounced shift in the market, from bad economic data is bad news for the market, to bad news for the economy and trade is good news for the Fed to take action and cut interest rates.
In other words, after the disappointing one-two punch of the IHS Markit US PMI and May ISM Manufacturing Index data, combined with the sharp uppercut that was the May ADP Employment Report, “hopium” has returned to the market.
Over the weekend, we received signs the potential trade war with Mexico will be averted, though few details were shared. China is up next, per comments from U.S. Treasury Secretary Mnuchin, who warned Beijing of tariffs to come if it does not “move forward with the deal … on the terms we’ve done.”
“If China doesn’t want to move forward, then President Trump is perfectly happy to move forward with tariffs to re-balance the relationship,” Mnuchin said.
Near-term, we’re likely to see more “bad news is good news” for the stock market as evidenced by Friday’s market rally following the dismal May jobs report that fell well short of expectations. More economic bad news is being greeted as a positive right now by the market under the belief it will increase the likelihood of the Fed cutting rates sooner than expected.
While that data has indeed led to negative GDP expectation revisions for the current quarter as well as the upcoming one, this new dynamic moved the market higher last week and helped reverse the sharp fall in the market in May, when the major stock indices fell between 6.5% and 8.0%.
As I see it, while the Fed has recently done a good job of telegraphing its moves, the new risk is the market over-pricing a near-term rate cut.
The next Fed monetary policy meeting is less than two weeks away and already expectations for a rate cut exiting that two-day event have jumped to around 21% from less than 7% just over a month ago, according to the CME FedWatch Tool.
Let’s remember there are four more Fed monetary policy meetings — in July, September, October and December — and those give the Fed ample room to cut rates should the upcoming G20 Osaka Summit on June 28-29 fail to get U.S.-China trade talks back on track.
To me, this makes the next two weeks imperative to watch and to build our shopping list. If there is no trade progress coming out of the G20 meeting, it increases the potential for a July rate cut. If trade talks are back on track, we very well could see the Fed continue its current wait-and-see approach.
And what about that potential for over-pricing a rate cut into the market? Anyone who has seen the Peanuts cartoons knows what happens when Lucy yanks the football out from under Charlie Brown at the last minute as he goes to kick it. If you haven’t, we can assure you it never ends well, and the same is true for the stock market when its expectations aren’t fulfilled.
Earnings expectations have yet to follow GDP expectations lower
Here at Tematica our view is that one of the clear-cut risks we face in the current market environment is the over- pricing in of a Fed rate cut at a time when profit and EPS expectations are likely to be revised lower for the second half of 2019. When we see falling GDP expectations like those depicted in the two charts above, it stands to reason we will likely see, at a minimum and barring any substantial trade progress at the G20 summit, companies adopt a more cautious tone for the back half of the year in the coming weeks as we enter the June quarter earnings season.
If that proves to be the case, we are likely to see negative revisions to EPS expectations for the second half of the year. Despite the slowing economic data and impact of tariffs, current expectations still call for an 11% increase in earnings for the S&P 500 in the second half of the year compared to the first half. Viewed a different way, those same expectations for the second half of 2019 call for mid-single digit growth on a year over year basis. To me, given the current backdrop there seems to be more downside risk to those expectations than upside surprise.
Between now and then, we should be listening closely as management teams hit the investor conference circuit this week and next. This week alone brings the Stifel Inaugural Cross Sector Insight Conference 2019, Morgan Stanley U.S. Financials Conference 2019, JP Morgan European Automotive Conference 2019, UBS Asian Consumer, Gaming & Leisure Conference 2019, Deutsche Bank dbAccess 16th Global Consumer Conference 2019, Nasdaq 40th Investor Conference 2019 and the Goldman Sachs 40th Annual Global Healthcare Conference 2019, to name just a few. What we’ll be listening for is updated guidance as well as industry comments, including any tariff impact discussion.
In my view, the conferences and the information spilling out of them will reveal what we are likely to see and hear from various industry leaders in the upcoming June- quarter earnings season.
The June rebound in the stock market propped up a number of the Thematic Leaders, most notably Cleaner Living leader Chipotle Mexican Grill (CMG) and Safety & Security leader Axon Enterprises (AAXN). Digital Infrastructure Leader Dycom Industries continues to tread water on a year to date basis, but with 5G deployments accelerating I see a more vibrant landscape for it as well as Disruptive Innovator Leader Nokia (NOK).
In recent weeks, we’ve gotten greater clarity and insight into forthcoming streaming video services from Apple (AAPL) and Disney (DIS), which are likely to make that market far more competitive than it has been to date. Disney’s rumored $6.99 per month starter price recently led Comcast (CMCSA) to not only abandon its own streaming initiative due in 2020 but to also sell its stake in Hulu to Disney. That to me is a potential game changer depending on how Disney folds Hulu’s streaming TV service into Disney+.
One of our key tenants is to observe the shifting landscape, and with regard to streaming video we are seeing the beginning of such a shift. For that reason as well as the risk of a challenging June quarter earnings season in the coming weeks, we are implementing a $340 stop loss on Digital Lifestyle Thematic Leader Netflix (NFLX). That will lock in a profit of just over 27% for NFLX shares.
Later this week, we’ll get the May Retail Sales report, which should once again showcase the accelerating shift to digital shopping. In my view, it’s just another positive data point to be had for Thematic King Amazon (AMZN)… as if all the UPS and other delivery vehicles aren’t enough proof.
As we brace for the second half of 2019, the growing battle between streaming video services will be joined by one for streaming gaming services. Already Apple has announced its own streaming gaming platform – Apple Arcade – and now we have the formal launch of Google’s Stadia streaming service in November.
We can also add Microsoft to that pack, which over the weekend shared that it will begin publicly testing its new videogame-streaming initiative in October. That service will allow users to stream any Xbox One game to a mobile device.
Much like streaming video service, content for streaming gaming services and price points will be crucial to converting gamers, particularly causal ones. We suspect over time higher profile titles will make their ways to these platforms, but at the outset, a lack of compelling or noteworthy content will likely mean a whimper not a roar of a start for this aspect of our Digital Lifestyle investing theme. As uptake grows over time, and much like video streaming, we can expect these streaming gaming platforms to tax existing broadband and mobile networks, spurring demand associated with our Digital Infrastructure investing theme.
Google on Thursday revealed key details of its upcoming Stadia service, which will let people stream A-list games to the Mac without having to own a high-end console or PC.
The service will launch in November in 14 different regions, among them Canada, the U.S., and the U.K., Google said. People wanting in at that point will have to pay $129 U.S. for a Founder’s Edition kit, including a Wi-Fi-connected Stadia controller, a Chromecast Ultra, and three months of Stadia Pro plus a “Buddy Pass.” Beyond that point Pro access will cost $9.99 per month, plus the cost of individual games not included with the subscription. Some games will be cheaper under Pro than they would be on markets like Steam or the Mac App Store.
The only announced bundle title is “Destiny 2,” though others are planned, and some should be announced at next week’s E3 expo in Los Angeles. Other confirmed Stadia games — bundled or otherwise — will include the likes of “Doom Eternal,” “Thumper,” “Baldur’s Gate 3,” “Borderlands 3,” and “Mortal Kombat 11.”
“Grand Theft Auto” and “Red Dead Redemption” developer Rockstar Games is confirmed as working on Stadia projects, but has yet to make them public.
Stadia Pro guarantees streams up to 4K at 60fps, with HDR and 5.1-channel surround, so long as the gamers have a 35-megabit connection. Google is working on a free version of Stadia with lower bandwidth requirements, but that will launch sometime in 2020 with quality capped at 1080p resolution and stereo sound.
Although a Chromecast Ultra will be required for TVs, gamers will also be able to play on Pixel 3 phones and any desktop or laptop with Google’s Chrome browser.
Stadia relies on streamlined Google data center connections instead of local processors or storage. The downside to this is that Stadia games can only ever work online, even purchased ones.
As we wind up the most recent barrage of quarterly earnings, we are being left with a sour taste in our collective mouths thanks to retailers, particularly those focused on apparel. While some data points to those mall-based retailers, like The Gap being hard hit, other data suggests retailers are not matching consumer preferences either for the apparel they have or investing in their digital shopping platforms. While the former points to the fickleness of the consumer, or the tone-deaf ears of certain retailers, the latter indicate that not all retailers have accepted the growing importance of digital commerce that is a key tenant of our Digital Lifestyle investing theme.
Is it easier to blame the weather and other items in the short-term for a failed strategy? Sure it is, but the real drivers of falling retailer results will come out in the coming quarters. Those like Target, Walmart and Costco that have been investing in digital commerce are likely to thrive while those that haven’t will likely disappoint further as Amazon begins free one-day shipping for Prime customers.
Clothing retailers like the Gap, Canada Goose and Abercrombie & Fitch are all experiencing troubling sales reports, the likes of which haven’t been seen since the Great Recession a decade ago, according to a report by CNBC.
Many companies are blaming the weather, slow traffic at malls, bad promotions and product blunders. With the industry as a whole struggling, the S&P 500 Retail ETX was down 2 percent on Friday (May 31), and has dropped almost 13 percent in May, which sets it up to be the worst period since November of 2008, when it lost 20.25 percent.
As a group, apparel retail earnings are down 24 percent, although earnings had been growing since Q3 of 2017. In Q1 of 2018, earnings gained 26 percent. In Q1 of 2008, earnings fell 40 percent.
“These are all mall-based retailers experiencing traffic issues,” Retail Metrics Founder Ken Perkins said. “The consumer is holding up … sentiment numbers have been really high.” The problem, he said, is that some companies aren’t investing in attracting customers to their stores and websites.
There are some bright spots. Target and Walmart both had good first quarters, and have been investing in apparel, with positive results.
“It’s not that people are buying fewer clothes,” CGP president Craig Johnson said. They’re going to different places, he said, and some older companies, like Chico’s and Talbots, which are “classic, women’s, missy retailers,” are victims of changing popular culture and taste.
“The demand for that product is a fraction of what it used to be a generation ago. Women aren’t dressing like that,” he said.
Another issue facing the industry is the threat of tariffs, which could worsen the outlook.
There’s the consideration of a 25 percent tax on clothing and footwear from China, and many companies haven’t factored in the effect this could have. There’s also the possibility of a 5 percent duty on Mexican imports on June 10, which would raise to 25 percent by October.
Welcome to the Thematic Signals podcast, where we look to distill everyday noise into clear investing signals using our thematic lens and our 10 investing themes. Every week we not only discuss key events that are shaping the stock market, but we also look at key sign posts for the changing economic, demographic, psychographic, and technological landscapes that are driving the structural changes occurring around us.
On this episode, with retailer earnings in the spotlight, we dig into which ones are winning the fight for consumer wallet share and those that are losing. The implications are huge given that retail accounts for nearly 20% of the S&P 500 and roughly 16% of US GDP. Those that are winning the wallet share fight, such as Target, Hibbett Sports, Walmart, TJX Companies. Best Buy and others are leveraging our Middle-Class Squeeze, Digital Society and to a lesser extent our Aging of the Population investing theme. We also talk about what investors should be looking for next as earnings season winds down and share some of the latest signals for our 10 investing themes.