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THE BEST STATE FOR BUSINESS
APRIL NEWSLETTER 2
ARMOUR REPORTS 1ST Q LOSS
Alphabet Inc. (NASDAQ: GOOGL) just made a huge step forward in terms of its renewable energy mission. Google’s Senior Vice President for Technical Infrastructure, Urs Hölzle, recently announced that Google’s total purchase of renewable energy exceeded the amount of electricity used by all of its operations around the world.
Over the course of 2017, across the globe, for every kilowatt-hour of electricity Google consumed, it purchased a kilowatt-hour of renewable energy from a wind or solar farm that was built specifically for Google. This makes it the first public company of its size to have achieved this feat.
According to Hölzle in a blog post:
We’ve been working toward this goal for a long time. At the outset of last year, we felt confident that 2017 was the year we’d meet it. Every year, we sign contracts for new renewable energy generation projects in markets where we have operations. From the time we sign a contract, it takes one to two years to build the wind farm or solar field before it begins producing energy. In 2016, our operational projects produced enough renewables to cover 57 percent of the energy we used from global utilities. That same year, we signed a record number of new contracts for wind and solar developments that were still under construction. Those projects began operating in 2017—and that additional output of renewable energy was enough to cover more than 100 percent of what we used during the whole year.
Keep in mind that Google is continually building new data centers and offices, and as demand for Google products grows, so does its electricity load. As such, the firm needs to be constantly adding renewables to its portfolio to keep up.
And in regions where Google can’t yet buy renewables, the firm will keep working on ways to help open the market.
We also think every energy buyer—individuals and businesses alike—should be able to choose clean energy. We’re working with groups like the Renewable Energy Buyers Alliance and Re-Source Platform to facilitate greater access to renewably-sourced energy.
Shares of Alphabet were last seen trading at $1,031.26, with a consensus analyst price target of $1,327.00 and a 52-week range of $817.02 to $1,186.89.
Unemployment has steadily declined and remains close to a 10-year low. And with investors confident about the economy, the Dow Jones Industrial Average broke through the 20,000 mark early this year. By these and other key measures, business in the United States appears to be booming.
This period of economic growth — much of it as a recovery from the Great Recession — has by no means been even across the country. A number of factors can explain the regional differences in economic growth, including the varying business climates across states.
To determine which states have the best and worst business climates, 24/7 Wall St. identified and reviewed nearly 50 measures of doing business. And the analysis showed that, edging out the likes of Massachusetts and Colorado, Utah was the best state for business:
> 1-yr. real GDP change: 3.4% (6th highest)
> Avg. salary: $45,204 (18th lowest)
> Adults w/ bachelor’s degree: 31.8% (16th highest)
> Patents issued: 1,404 (23rd highest)
> Working-age population chg. 2010-2020: +20.5% (2nd highest)
Utah is this year’s best state for business. The state’s labor market and regulatory climate are particularly business friendly compared to other states. Utah’s working-age population is projected to grow by more than 20% between 2010 and 2020, far greater than the comparable projected growth nationwide of less than 5%. Businesses are constantly looking for cost-cutting opportunities. Therefore, a state’s regulatory climate, including its tax policy and the power unions have in the state, can be a major factor when a company is considering where to locate and conduct business. Utah is among the top states in the Mercatus Center’s Regulatory Freedom Index, a ranking of state tax policy. Also, just 3.9% of Utah’s workers are union members, the third lowest share of all states. While this is perhaps less friendly to workers, it is a good sign for most businesses.
That is a far cry from Louisiana, which placed as the worst state to do business, in part due to the dwindling working-age population.
Fortnite is the next big video game, there is no doubt about it. We’ve seen the rise and fall of Overwatch and then the rise of Player Unknown Battleground — better known as PUBG — but now Fortnite is taking the world by storm. And this could spell some problems for major video game publishers.
As recently as February, the firm Superdata noted that Fortnite generated an incredible $126 million in-app purchases. And for the first time, it pulled ahead of the competition from PUBG.
Fortnite also has received special attention from celebrities and athletes. The Pacer’s guard Lance Stephenson recently sported a pair of shoes referencing Fortnite in bright yellow letters. Even the rapper Drake streamed a game with famed Fortnite player Ninja, garnering even more popularity for the game.
With this incredible rise in popularity, other major video game publishers should be worried. Or at least they should be crafting their own Battle Royale sandbox game to not get totally pwned.
The boutique investment firm KeyBanc weighed in on Fortnite and how its popularity could have an influence on other video game firms. KeyBanc went so far to say that it expects this wildly popular game to negatively impact earnings for publishers Activision Blizzard Inc. (NASDAQ: ATVI), Electronic Arts Inc. (NASDAQ: EA) and Take-Two Interactive Software Inc. (NASDAQ: TTWO), based largely on proprietary survey results and credit-card data.
As a result, the firm is reducing its revenue and EPS estimates for all three, as it thinks Fortnite, made by closely held Epic Games, is siphoning away player engagement and spending in some of those companies’ biggest titles. Still, KeyBanc says it views recent stock declines for the trio as “a meaningful buying opportunity.” Activision, EA and Take-Two are slated to release their next earnings reports in early May.
Shares of Activision Blizzard traded down over 1% to $64.54 on Wednesday. The stock has a 52-week trading range of $48.41 to $79.63 and a consensus analyst price target of $76.58.
EA shares were last seen down about 2% at $117.31, with a consensus price target of $138.12 and a 52-week range of $87.94 to $131.13.
Take-Two was down 1% at $94.84 a share. The 52-week range is $57.36 to $129.25. The consensus price target is $131.15.
When analysts issue flash research notes after earnings or other key news events, it is no unheard of that their initial stance gets muted or reversed. After all, analysts are people and sometimes they change their minds like the rest of us. That being said, in the case of General Electric Co. (NYSE: GE) there was a major analyst reversal in a very short period, which might throw many GE investors off on first look.
GE’s earnings report came out on Friday morning and the flash call from Andrew Obin was still a Buy rating and a $35 price objective. Then on Tuesday, Obin’s call sounded drastically different — and now Merrill Lynch is a far cry from being among the most bullish on GE.
Merrill Lynch has now downgraded GE shares to Neutral from Buy, and Obin’s price objective was cut to $31 in the call. The main concern here is that Obin now feels investors should move to the sideline until earnings expectations are brought down.
GE had originally targeted $2.00 in earnings per share in fiscal year 2018. At $1.72 in earnings per share for 2018, Merrill Lynch is now under the consensus estimate that is closer to $1.90 per share. Obin does note that investors were already discounting that $2.00 per share target, but not by enough.Tuesday’s call views GE’s free cash flow conversion disconnect as reflective of the reinvestment cycle. The firm sees fair valuation at a trough of the free cash flow cycle. Tuesday’s investment rationale looks quite different from the flash note issued a couple of days before:
NEW RATIONALE — We think GE is well positioned in the long-run as reinvestment cycle and strategic acquisitions (Alstom, BHI) should pay off in the form of outgrowth vs peers and runway on margin expansion. However, we do not see the stock outperforming in the face of negative earnings revisions and an expected larger cut to 2018 expectations yet to come.
LAST WEEK’s RATIONALE — We forecast GE to post double-digit EPS growth in its Industrial business, which puts it as one of the highest growth large-cap Industrial names. The April 10 announcement of a staged exit of most GECC businesses may translate to more regulatory visibility at GECC, allowing it to upstream more capital to the parent and GE utilizing its industrial balance sheet more efficiently.
As far as earnings drivers, Obin warned:
There are a number of drivers for the earnings reset over the past two years, including Oil & Gas downturn (GE tends to be a later-cycle exposed business in the space), peak of US gas-fired power gen cycle and impact of energy slowdown on power orders in emerging markets, delayed recovery in mining and downturn in US rail capex, and negative FX. We note that Oil & Gas higher estimates for 2018 in our model reflect the BHI acquisition, which is expected to close in mid-2017.The bottom-up utilities capex analysis indicates that 2016 likely marked the peak of US power gen capex, which will likely weigh on GE’s growth in the Power end market over the coming years. The BofAML forecast calls for a 5% capex decline in 2017 with another 3% decline in 2018.
GE shares have not exactly participated in the big recovery. GE’s pre-earnings closing price last Thursday was $30.27, and GE shares closed at $29.55 on Friday and again on Monday. Tuesday’s initial reaction had GE shares trading down another 0.3% at $29.45 right after the opening bell.GE’s 52-week trading range is $28.19 to $33.00.
A Tesla Inc. (NASDAQ: TSLA) Model X crashed on Highway 101 near Mountain View, California, on Friday, March 23, killing the driver. At the time of the crash, the vehicle’s Autopilot system was engaged and, according to Tesla, the driver had received several warnings from the system and did not have his hands on the steering wheel at the time of the crash.
Less than a week earlier, a self-driving Uber vehicle with a human driver struck and killed a pedestrian in Tempe, Arizona. The U.S. National Highway Traffic Safety Administration is investigating both incidents.
According to Tesla, this is what happened in the Model X crash:
In the moments before the collision, which occurred at 9:27 a.m. on Friday, March 23rd, Autopilot was engaged with the adaptive cruise control follow-distance set to minimum. The driver had received several visual and one audible hands-on warning earlier in the drive and the driver’s hands were not detected on the wheel for six seconds prior to the collision. The driver had about five seconds and 150 meters of unobstructed view of the concrete divider with the crushed crash attenuator, but the vehicle logs show that no action was taken.
The reason this crash was so severe is because the crash attenuator, a highway safety barrier which is designed to reduce the impact into a concrete lane divider, had been crushed in a prior accident without being replaced. We have never seen this level of damage to a Model X in any other crash.
The Tesla blog post goes on to extol the virtues of the company’s Autopilot hardware, noting that drivers of an Autopilot-equipped Tesla are “3.7 times less likely to be involved in a fatal accident.” The post then refers to the dog that didn’t bark:
No one knows about the accidents that didn’t happen, only the ones that did. The consequences of the public not using Autopilot, because of an inaccurate belief that it is less safe, would be extremely severe. There are about 1.25 million automotive deaths worldwide. If the current safety level of a Tesla vehicle were to be applied, it would mean about 900,000 lives saved per year. We expect the safety level of autonomous cars to be 10 times safer than non-autonomous cars.
Technology companies and traditional automakers have invested large sums on developing autonomous driving technology, and while that development may be slowed down by fatal crashes it is not going to stop. But there are limits to today’s autonomous technology and carmakers and technologists need to curb the marketing messages and design the systems to account for their limitations and clearly describe what the autonomous systems do and don’t do.
BlackBerry Ltd. (NASDAQ: BBRY) reported its fiscal fourth-quarter financial results before the markets opened on Friday. The company posted $0.02 in earnings per share (EPS) and $286 million in revenue. The consensus estimates from Thomson Reuters had called for a net loss of $0.01 per share and revenue of $289.34 million. In the same period of last year, the company posted a net loss of $0.03 per share and $464 million in revenue.During the latest quarter, the company entered into a long-term, software licensing agreement with Optiemus Infracom to design, manufacture, sell and support BlackBerry-branded mobile devices in India, Sri Lanka, Nepal and Bangladesh.Another highlight during this quarter came from the Mobile World Congress, where TCL launched the BlackBerry KEYone, the most secure Android phone in the world, featuring a smart QWERTY keyboard. The KEYone is the first device launched under the company’s licensing agreement with TCL.
In terms of guidance, BlackBerry said that it expects to grow at or above the overall market in its software business. The firm also expects to be profitable on a non-GAAP basis and to generate positive free cash flow for the full year. The consensus estimates are $0.01 in EPS and $978.95 million in revenue for this fiscal year.Total cash, cash equivalents, short-term and long-term investments increased by $89 million to approximately $1.7 billion, reflecting free cash flow of $16 million.
John Chen, executive chairman and CEO of BlackBerry, commented:
I am pleased to report that our Q4 results came in at or above expectations in all major metrics. In the quarter, we continued to grow our mix of software and services revenue across the company. In turn, this allowed us to expand our operating margin and report positive free cash flow. In addition, our balance sheet continues to strengthen and benefit from reduced capital requirements with our focus on software and licensing.
Shares of BlackBerry closed Thursday down 0.9% at $6.95, with a consensus analyst price target of $7.92 and a 52-week trading range of $6.23 to $8.46. Following the announcement, the stock was up 8.5% at $7.54 in early trading indications Thursday
Under Armour Inc. (NYSE: UAA) reported its first-quarter financial results before the markets opened on Thursday. Although the company posted its first loss since going public, it was barely a loss, and it seems that investors were more thrilled about the top-line growth that they missed last quarter.The apparel giant said that it had a net loss of $0.01 per share and $1.1 billion in revenue, versus consensus estimates from Thomson Reuters that called for a net loss of $0.04 per share and revenue of $1.11 billion. The same period of last year reportedly had earnings per share (EPS) of $0.04 and $1.05 billion in revenue.North American revenue dropped 1% as new distribution was more than offset by the absence of business lost to bankruptcies in 2016. International revenue, represented 20% of total revenue in the quarter and was up 52% (up 57% currency neutral).
The company reported its segment revenues for the quarter as follows:
Apparel revenues increased 7.3% from last year to $715.4 million.
Footwear revenue grew 2.0% year over year to $269.7 million.
Accessories revenue jumped 11.8% to $89.1 million.
In terms of outlook for the 2017 fiscal year, the company expects net revenues to grow 11% to 12%, as well as up to 12% to 13% on a currency-neutral basis. Under Armour also expects operating income to reach $320 million in this time.The consensus estimates for the full year are $0.42 in EPS and $5.36 billion in revenue.
On the books, Under Armour cash and cash equivalents totaled $172.13 million at the end of the quarter, up from $157.0 million in the same period from last year.Kevin Plank, Under Armour’s board chair and chief executive, commented:Our first quarter results were in line with our expectations and we’re off to a solid start in 2017. By proactively managing our growth to deliver superior innovative product, continuing to strengthen our connection with consumers and increasing our focus on operational excellence – we have great confidence in our ability to drive toward our full year targets.
Shares of Under Armour closed up 0.9% at $19.71 on Wednesday, with a consensus analyst price target of $22.35 and a 52-week trading range of $18.40 to $45.99. Following the release of the earnings report, the stock was up nearly 10% at $21.58 in early trading indications Thursday.
MERRIL LYNCH DOWNGRADES GE
Some of the biggest companies in the tech sector are making major bets on artificial intelligence (AI), also often called deep learning. Alphabet Inc. (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL) lead in acquiring smaller companies, but there are plenty of big players.
Why the gold rush? According to a report out Wednesday morning from IDC, worldwide revenues for cognitive and AI systems will rise 59.3% this year to $12.5 billion and global spending on AI will explode at a compound annual growth rate (CAGR) of 54.4% through 2020 when revenues will top $46 billion. That’s enough to get anyone’s attention.
Of this year’s total spending, some $4.5 billion is targeted at cognitive applications that automatically learn, discover and make recommendations or predictions. Cognitive applications are expected to see a CAGR of 69.6% over a five-year period.
IDC research director David Schubmehl noted:
Intelligent applications based on cognitive computing, artificial intelligence, and deep learning are the next wave of technology transforming how consumers and enterprises work, learn, and play. These applications are being developed and implemented on cognitive/AI software platforms that offer the tools and capabilities to provide predictions, recommendations, and intelligent assistance through the use of cognitive systems, machine learning, and artificial intelligence. Cognitive/AI systems are quickly becoming a key part of IT infrastructure and all enterprises need to understand and plan for the adoption and use of these technologies in their organizations.
In addition to Google, which paid $600 million for U.K.-based DeepMind Technologies in 2014 and has made 11 acquisitions since 2013, and Apple, which has made a total of 7 acquisitions of AI-related firms, Intel Corp. (NASDAQ: INTC), Microsoft Corp. (NASDAQ: MSFT) and Facebook Inc. (NASDAQ: FB) have also made multiple acquisitions of AI technology firms. International Business Machines Corp. (NYSE: IBM) has made three acquisitions and has been pushing its Watson technology hard for some time now.
Non-tech firms are also making acquisitions. Ford Motor Co. (NYSE: F) recently paid $1 billion for a one-third stake in Argo AI and General Electric Co. (NYSE: GE) acquired Bit Stew and Wise.io last November.
IDC research manager Marianne Daquila noted which sectors are most likely to spend the most on AI:
Heavily regulated markets such as banking and securities investment services are among the early growth drivers. Collectively, these two financial industries will represent a quarter of worldwide spending on cognitive/AI solutions. Stringent compliance requirements are key drivers for these industries as they seek new innovations in fraud and risk detection. Additionally, companies in this sector are adopting cognitive-based program advisors and recommendations to better match products with clients. Elsewhere, manufacturing, retail, and healthcare are also expected to see very strong spending growth over the forecast period.
Of the projected $12.5 billion in 2017 spending, U.S. firms are expected to spend nearly $9.7 billion.