The Orbitz hack is more confirmation for our Safety & Security investing theme

I just received an email notification from American Express (AXP) detailing the following:

“We are writing to let you know that American Express recently learned that our third-party vendor, Orbitz, was the victim of a cyber attack. “

Of course, this is the latest announced high profile cyber attack, which in my view serves as a reminder of the risks to be had as we migrate more of our lives into the digital world. Add in the renewed concerns over privacy following the latest happenings with Facebook (FB) and we here at Tematica see pain-point related demand continuing to rise for our Safety & Security investing theme. As a reminder, this theme stretches beyond national and homeland security to include cybersecurity as well as personal security. And for those wondering, Orbitz is own by Expedia (EXPE).

 

Another day, another breach. Today, online travel agency Orbitz disclosed that hackers managed to get both credit card data and personal information (though no Social Security numbers and passwords) from users who made their travel purchases on the site between January 1, 2016 and December 22, 2017.

In total, the company says, that’s about 880,000 payment cards that were accessed from what the company calls a “legacy Orbitz platform.”The hackers also likely accessed other data, like names, physical or mailing addresses, birth dates, email addresses, phone numbers and the customer’s gender while they were in the systems between October and December 2017.

While this breach isn’t at the level of the giant Equifax and Yahoo hacks, here is yet another company that couldn’t keep your data safe. Indeed, at this point, you can pretty much assume that all of your personal data and likely your passwords and credit cards, too, are up for sale in one of the darker parts of the internet.

Source: Hackers gain access to 880K credit cards from Orbitz customers | TechCrunch

A Content is King primer on the developing world of e-sports

A Content is King primer on the developing world of e-sports

 

 

Amid expanding markets such as digital commerce and streaming video that sit at the top of our Connected Society investing theme —and to some extent, our Content is King one  — other growing markets and their opportunities can be stepped over and missed from time to time. One that I’ve been keeping tabs on from the periphery market is e-sports, but even I tend to sit up and take notice when the market for this form of content consumption is set to grow from $493 million in 2016 to $660 million this year, and more than $1.1 billion in 2019. That’s remarkable growth, fueled by a growing base of global enthusiasts, and one that is seeing Corporate America sit up and take notice as well.

That’s right, as amazing as it might sound, more than 20 years after the first video game tournaments, top e-sports tourneys now draw audiences that rival the biggest traditional sporting events. A decade ago, amateur competitions drew a few thousand fans in person and over the Internet. In October 2013, 32 million people watched the championship of Riot Games’ League of Legends on streaming services such as Twitch and YouTube — that’s more than the number of people who watched the TV series finales for Breaking Bad, 24 and The Sopranos combined; it’s also more than the combined viewership of the 2014 World Series and NBA Finals.

In 2015, Twitch reported more than 100 million viewers watch video game play online each month. According to the Entertainment Software Association, more than 150 million Americans play video games, with 42% of Americans playing regularly. The key takeaway from this litany of statistics is the e-sports market has continued to grow. And it is poised to continue doing so, as casual-to-serious players become tournament viewers.

In the last few months, streaming service Hulu has picked up four new series that are centered around e-sports as part of its move to replicate the success at Netflix (NFLX) and Amazon (AMZN) in their push to create original and proprietary content. Another sign that e-sports are turning into a big business was at rating company Nielsen (NLSN) when it launched a new division focused on providing research on e-sports.

One of the opportunities being assessed by Nielsen lies in measuring the value of e-sports tournament sponsorships. In 2017 there are more than 50 such events, with recent and current e-sports tournament sponsors including Coca-Cola (KO), Nissan, Logitech (LOGI), Red Bull, Geico, Ford (F), American Express (AXP) and a growing list of others.

Tournaments streamed to everyone over Twitch.tv have reported five million concurrent viewers for Dota 2 and 12 million concurrent viewers for League of Legends. And these viewers tend to be the ones consumer product companies want — more than half of e-sports enthusiasts globally are aged between 21 and 35 and skew male. That’s the sound of disposable income you hear — and so do those sponsors.

The ripple effect is even moving past tournaments into movies and other content forms. Video game maker Nintendo (NTDOY) is reportedly near a deal with Illumination Entertainment, a partner of Comcast (CMCSA) to bring its flagship Super Mario Bros. franchise to the big screen. Granted Super Mario is not quite the same as some of the games associated with e-sports, but it is one of the most popular video game franchises of all-time, with the series of games selling over 330 million units worldwide. Over the last few quarters, we’ve seen a film hit screens based on the Assasin’s Creed game that was first released in 2007, and this leads us to think we could see more storylines developed much the way Disney (DIS) and 21st Century Fox (FOXA) are doing with the Marvel characters and Time Warner (TWX) with Batman, Superman, and other DC comics properties.

When I see a market taking shape like this, with these characteristics and all the confirming data points to be had, it means looking at which companies are poised to benefit from this aspect of our Content is King investing theme.

In this case, that means interactive gaming content ones like Electronic Arts (EA), Activision Blizzard (ATVI) and Take-Two Interactive (TTWO) among others. In looking at the industry data, we find a rather confirming set of data given the most recent monthly video game sales data for September published by NPD Group showed robust year-over-year sales, up 39% to $1.21 billion.

Breaking it down, software sales soared 49% due to the continued shift to console and portable platforms and away from PCs, and hardware sales rose 34% vs year ago levels. The top three games of the month were Activision’s Destiny 2, NBA2K18 by Take-Two and Madden NFL 18 by Electronic Arts. That set the stage for third-quarter 2017 earnings for these companies, especially given that in September Activision’s Destiny 2 became the best-selling game of thus far in 2017.

Recently, Electronic Arts shared on its third-quarter 2017 earnings call that among its growth priorities is the expansion of live services, which includes the integration of the company’s e-sports business across more gaming titles. As such, EA sees competitive gaming becoming a greater piece of its portfolio, as it builds on Madden NFL Club Championship, the first e-sports competition to feature a full roster of teams and players from a U.S. professional sports league. Tournaments to represent all 32 NFL teams are already underway.

Meanwhile on its September quarter earnings call Activision Blizzard confirmed its e-sports Overwatch League will begin regular season play on January 10, it has inked sponsorship deals with Hewlett-Packard (HPQ) and Intel (INTC) and the Overwatch community now spans more than 35 million registered players. The league has 12 inaugural teams complete with physical and digital merchandise for sale to fans.

We’ll be watching to see the initial reception as pre-season competition begins next month at the Blizzard Arena Los Angeles and we’ll be sure to crunch the numbers and understand what’s baked into existing expectations for ATVI shares and the others. Those answers will help determine how much additional upside there is to be had near term, following the meteoric rise of ATVI shares this year — up more than 75% year to date vs. 25.7% for the Nasdaq Composite Index and more than 15.0% for the S&P 500.

 

 

 

What Now After Being Stopped Out of Costco Shares?

What Now After Being Stopped Out of Costco Shares?

On Friday afternoon we were stopped out of Costco Wholesale (COST) shares on the Tematica Select List when they briefly dipped below our $170 stop loss. Even though it was for the briefest of moments, the $169.90 low for the day means that protective measure was triggered following quarterly earnings that missed expectations Thursday night. Recall we sold half the position for a gain of more than 14 percent before dividends, and when paired with the stopping out of the remainder of the position, the blended return before dividends on the Tematica Select was 14 percent vs. a 9.8 percent move in the S&P 500 over the same time frame.

 

The Catalyst Behind the Dip in the Share Price

While Costco’s revenue for the quarter was a whisper below expectation, earnings for the quarter were impacted by gross margin pressure primarily due to lower gas profitability vs. a year ago. You’ve probably noticed that gas prices have undergone a large double-digit increase since last year, and even Costco is not immune. In our view, this highlights the company’s thin retail margin structure, which can create earnings volatility from time to time.

While many focused on the earnings miss, we have been far more focused on Costco’s announced membership price increase that will bring its primary membership to $60 from $55 and its Executive Memberships in the US and Canada to $120 from $110. We see those $5 and $10 increases as not egregious, especially when compared to the $100 increase in the annual fee for American Express’s (AXP) Platinum Card that kicks in later this year, and suspect the vast majority of Costco members won’t blink at the price hike.

From an investor perspective, we like the announced price hikes because it translates into higher membership fees, which account for roughly 75 percent of overall operating income and help stabilize quarterly retail margin swings. Paired with more warehouse locations as Costco continues to grow its footprint and as Cash-strapped Consumer turn increasingly to Costco for fresh foods as well as bulk items, we continue to see solid revenue and earnings growth ahead. Exiting its most recent quarter, Costco had 728 warehouses, up from 698 in the year-ago quarter, with plans to add another 29 locations during 2017.

Again, we were stopped out of the position on Friday, but given the business model dynamics and Costco continuing to benefit from the Cash-strapped Consumer tailwind, we’re inclined to revisit the shares in the coming weeks with an eye toward getting them back on the Tematica Select List at better prices.

Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

On Friday shares of Costco Wholesale (COST) came under pressure triggered by quarterly earnings that missed expectations Thursday night. While revenue for the quarter was a whisper below expectation, earnings for the quarter were impacted by gross margin pressure primarily due to lower gas profitability vs. a year ago. You’ve probably noticed that gas prices have undergone a large double-digit increase since last year, and even Costco is not immune. In our view, this highlights the company’s thin retail margin structure, which can create earnings volatility from time to time.

We’ve seen such thin margins before when examining brick & mortar retailers across the board from Macy’s (M) and Kohl’s (KSS) to Kroger (KR). It makes for a challenging business, but when it comes to Costco, there’s a key differentiator above and beyond its offering of bulk products.

While many focused on the earnings miss, we have been far more focused on Costco’s announced membership price increase that will bring its primary membership to $60 from $55 and its Executive Memberships in the US and Canada to $120 from $110. We see those $5 and $10 increases as not egregious, especially when compared to the $100 increase in the annual fee for American Express’s (AXP) Platinum Card that kicks in later this year, and we suspect the vast majority of Costco members won’t blink at the price hike.

From an investor perspective, we like the announced price hikes because it translates into higher membership fees, which account for roughly 75 percent of overall operating income and help stabilize quarterly retail margin swings. Paired with more warehouse locations as Costco continues to grow its footprint and as Cash-strapped Consumer turn increasingly to Costco for fresh foods as well as bulk items, we continue to see solid revenue and earnings growth ahead. Exiting its most recent quarter, Costco had 728 warehouses, up from 698 in the year-ago quarter, with plans to add another 29 locations during 2017. More locations with more members paying more in membership fees equal more operating income to be had in the coming quarters. As any student taking Financial Statement Analysis knows, operating income is one of the key determinants of Net Income and EPS generation

Given the business model dynamics and Costco continuing to benefit from the Cash-strapped Consumer tailwind, we’re inclined to revisit the shares in the coming weeks with an eye toward getting them back on the Tematica Select List at better prices.

For those looking for more insight on the bulk product and warehouse club industry, but with a hefty dose of our Connected Society investing theme be sure to check out our most recent podcast where we talk with the CEO of Boxed.

Mastercard Data Show Chip Cards Are Worth the Wait When it Comes to Card Fraud

Mastercard Data Show Chip Cards Are Worth the Wait When it Comes to Card Fraud

 

While we may not be enthused with the longer check out times associated with the move to chip cards, data from MasterCard shows a few more minutes is making all the difference when it comes to credit card fraud.

Credit card fraud is down by more than 60% at Mastercard’s top five EMV-enabled merchants since chip cards were introduced late last year, according to the company.

Mastercard reports that 8 out of 10 of its U.S. cardholders have chips and counts 1.7 million chip-active merchants on its network — about 30% of total U.S. retailers. During a similar appraisal in May, Visa estimated 1.2 million stores were chip enabled.

Source: Mastercard: Chip cards cut fraud by 60% | Chain Store Age