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Ubisoft (Buy): Two positives at the beginning of June
This weekend sees Ubisoft's latest title, The Crew 2, move into open beta. Our early tracking of social media suggests it is being well received. The original title, released in 2014, was described as an average, hollow racing game that didn't trouble rivals Forza or Need for Speed. We were impressed with the gameplay shown last year at E3 and felt the variety of experiences, challenges and types of vehicles (changing from a stunt plane to a speed boat on the fly for example) was a massive improvement. The beta shows a 'loot system' where items are awarded after finishing certain races and with them allowing customization of parts and performance (handling, power, speeds) could be attractive for gamers who increasingly like 'skins' in their gaming experience. The game is set in an open world environment which is a scaled down version of the United States. It is only in beta today — but the signs are good.
Ubisoft has also confirmed, after a leak, that there is a new Assassin's Creed planned and will be showcased at E3. Assassin's Creed Odyssey is the latest title and the teased clip suggests it will be set in Ancient Greece with the Spartans in a vein similar to the movie 300. Our best guess right now is that the timing of the product could be for the first or second quarter of 2019 (annualised from the Far Cry 5 successful launch this year) which would leave the fall 2018 release window open for Splinter Cell perhaps (more on this in the E3 review we will send out next week)? More will be revealed on Monday 11th June at Ubisoft's press presentation and investor day on June 12th. We will report back from both.
DISH (Sell): no respite in sight
Whether it is uncertainty over spectrum/wireless build out, OTT differentiation or structural cable cord cutting Dish remains exposed. Dish's Sling TV has taken three years to amass 2.3M subscribers. This week rival Hulu announced the company had signed up 800k subs within a year of launch which is impressive given the plan costs 2x as much as Sling. The basic plan costs $40 for 50 live channels versus $20 for 30 or $25 for 40 channels at Sling.
Last week co-founder Charlie Ergen outlined plans to spend $500M-$18 on a phase one build out of wireless assets which focus on narrowband tech. A second phase would cost $10B but will wait for standards for 5G. So the hope that Dish would sell the spectrum assets for significant financial gains got another setback and the path if the company is now going to develop their own network, but it is both years behind rivals and probably subscale given the investments suggested.
Dish's partners, Northstar Wireless and SNR Wireless, are waiting on the U.S. Supreme Court to decide if it will take on a case about FCC denials of small-business discounts. The decision is likely in June and Dish funded SNR and Northstar want the Supreme Court to hear the case which challenges the FCC decision that forced the companies to return a $3.36 small business discount and imposed a $516M penalty on the basis that Dish controls the companies and therefore the discounts shouldn't apply.
Nintendo (Buy): Pokemon, and maybe Fortnite, can add to Switch momentum
We expect more details of games from Nintendo at E3 but this week Nintendo has showcased significant software plans for the key franchise IP of Pokemon on Switch. Pokemon has the potential to be a big driver of Switch take up for two reasons: (1) these are the first RPG (role playing games) for the franchise (2) there is a massive installed base of Pokemon fans which could be drawn in. Some 227M unit sales on Nintendo's own platforms historically (see chart below) and 300M in total have been sold. And this isn't including the +800M downloads of Pokemon Go game in the first year of launch.
The announcement of Pokemon Quest wasn't expected and is coming on both Switch and smartphones. It will be a new free, non-core NPG, released today on Switch with a mobile version available from June. The RPG format of Pokemon: Let's Go Games will come out in November. "Let's Go, Pikachu!" and "Let's Go, Eevee!" will cost $60 and users will be able to transfer some of the characters they collect from playing Pokemon Go which still has 65M active MAUs. This will be co-op play emphasis and is aimed at a broader audience. There is also a brand new competitive play RPG Pokemon in development for release in H2 19.
Nintendo's first party switch software continues to impress. Nintendo has four first party Switch games with a Metascore above 90 (out of 100). Super Mario Odyssey and The Legend of Zelda: Breath of the Wild both have a Metascore of 97, with Mario Kart 8 Deluxe and Bayonetta 2 both scoring 92. As we have often said, through our thematic work on the industry, it is compelling content and engagement which drives the eGaming cycle and in the performance of these titles Nintendo has delivered.
On Friday, media outlets reported that the extremely popular Fortnite Game was likely coming to Switch. It was spotted that the game was on a ratings application from publisher Epic Games for the Nintendo Switch platform at the Korean Game Rating and Administration Committee, one of the final steps before launch. The very design of the game is for it to be device agnostic and we know that an Android version is in the works to complement the PC, iOS, Xbox and PlayStation formats. With the unique controller gaming experience of the Switch and the portability option this could end up being a goldmine and accelerate adoption, if it were to happen.
Nintendo's earnings profile remains resilient. The stock continues to enjoy high earnings revisions rankings relative to global equities (Stoxx Global 1800 used in the illustration.
Facebook (Sell): habits are changing. There may be trouble ahead
A new survey released by eMarketer on Friday shows that for US users who are sharing less with friends and family on the platform it is often because of trust. 47% of such respondents said that the reason was due to privacy concerns. It comes after a Gallup poll last month showed that 43% of Facebook users were very worried about the invasion of privacy. Now this may not manifest into platform behaviour changes yet but the first effect could be to see slowing DAU/MAU metrics and lower engagement. In turn, this could lead to marketers questioning the digital ROI of the platform. As we mentioned last week, we see evidence of Twitter attempting to capitalise by introducing a new timeline ad campaign for publishers as the company shifts deeper into programmatic ads.
Zynga (Buy): complementary deal and margin uplift ahead
The key push v pull argument on Zynga has been on how the company will get to a stated aim of a 20% adjusted EBITDA margin. The company is executing on the progress of the same and this week's acquisition of Gram Games should help achieve that target with projected EBITDA contribution of $12M in 2018 and $20M in 2019. The price of the deal at $250M seems reasonable and will bring in a 75 person studio in London and Istanbul that fits into the Zynga strategy of connecting interactive entertainment with players. Gram has success in building hyper-casual games and Merge games. The Merge series uses the mechanic of merging two puzzle pieces together to solve a puzzle and is a mechanic that makes free-to•play games easy and addictive.
The strategic shift towards live services is paying off, with frequent content updates driving higher average revenue per user and engagement. Audience numbers are on the rise with DAU's up +19% YoY and MAU's +30% YoY. Zynga guided Q2 adjusted EBITDA to $37M above consensus (Factset) $35.7M, and the Q2 guidance implies the company is on track with adjusted EBITDA margin of 18% expected for Q2. Zynga has now delivered EBITDA upside for eight straight quarters.
Salesforce.com (Buy): no slowing in sight
Salesforce.com, despite high expectations, still managed to beat and raise. 10 revenue of $$3.018 was ahead of consensus (Factset) $2.948 driven by subscription beat ($.281B above $2.73B expected), Non GAAP OM of 17.1% 190bps above street. Raise FY guidance for revenues of $13.075-$13.1258 and EPS of $2.29-$2.31 above consensus $12.73B and $2.12. Company revenue run rate of $12B/year, growing 25% YoY. A quite remarkable feat — we remember when it reached $18 in 2009 and $5B in 2014. Artificial Intelligence, through its Einstein assistant, is delivering nearly 2 billion predictions every day and its ease of use is seen as key driver of adoption. This is almost double the number in February
and the ability to include custom sales and service forecasting in the predictive analytics can only help further embed salesforce CRM in customers' spending priorities.
Summary
This week has seen much focus on macro concerns and the ongoing uncertainties of the U.S. trade tensions. The micro has been significantly quieter, not helped by a shortened week in both the U.K. and U.S. Ahead of the E3 conference for the video game industry next week many stocks in the sector acted well at the end of May and we reflect on the performance of our eGaming basket. We also update performance of our Global TMT First XI and Worst XI lists. We take a look, through the work and help of our strategy team, at the valuation of European equities relative to the U.S. and are reminder of the great earnings momentum for Logitech and the awful trends at Swisscom. We continue to count the ways that China is moving up the IP curve and highlight how the risk of Apple internalising components has come earlier than expected for Dialog. At the stock level we have updates on Ubisoft, DISH, Facebook, Nintendo, Zynga, and salesforce.com.
eGaming: outperformance ahead of E3
With E3 just a week away we will be sending out an updated eGaming primer and E3 preview note in the next couple of days. The eGaming basket continues to generate alpha and had a good end to May. Year to date the eGaming basket has returned +18% through the end of May. This compares to a return of the MSCI World Index of 1% and the Video Game Tech ETF return of 10%. If, hypothetically, the eGaming basket had been running for a last year the 12 month returns of the basket would have been 60%. This is double the return of the Video Game Tech ETF +30% and 6x the performance of the MSCI World Index.
paul, definite growing pains. . please provide me a total list of all transaactions initatied by you since inception. dates cost. p and I realized and unrealized. . ticker symbol. . etc I think your thoughts on sectors is accurate. however its execution m bears littel resemblance. . ge being a sum of parts , is not a strategy. ? watching nespar go the other way and keeping the position. is not a stratgey. . e gaming , as a view is a good one, nintendo. ? probably not the best way to play it. owning google amazon facebook. . is a core positon . if i wanted to follow berkshire , its easy enough. netiher of these positions requres judgement .. analysis. views. expertise.
Below is a sector breakdown as of May 31st. I will send you a new breakdown on Monday reflecting the unwinds done on Friday.
The GE idea came from Melius Research (the former #1 Ranked Industrials Research Analyst at Barclays). See attached. I thought they made a compelling argument that the stock was worth $27.
Nintendo — I get my eGaming ideas from Mirabaud Research who are the best in this space. They had recommended Ubisoft and CD Projekt which are working well.
Nintendo (Buy): Pokemon, and maybe Fortnite, can add to Switch momentum We expect more details of games from Nintendo at E3 but this week Nintendo has showcased significant software plans for the key franchise IP of Pok&non on Switch. Pokemon has the potential to be a big driver of Switch take up for two reasons: (1) these are the first RPG (role playing games) for the franchise (2) there is a massive installed base of Pokemon fans which could be drawn in. Some 227M unit sales on Nintendo's own platforms historically (see chart below) and 300M in total have been sold. And this isn't including the +800M downloads of Pokemon Go game in the first year of launch.
The announcement of Pokemon Quest wasn't expected and is coming on both Switch and smartphones. It will be a new free, non-core NPG, released today on Switch with a mobile version available from June. The RPG format of Pokemon: Let's Go Games will come out in November. "Let's Go, Pikachu!" and "Let's Go, Eevee!" will cost $60 and users will be able to transfer some of the characters they collect from playing Pokemon Go which still has 6SM active MAUs. This will be co-op play emphasis and is aimed at a broader audience. There is also a brand new competitive play RPG Pokemon in development for release in H2 19.
Nintendo's first party switch software continues to impress. Nintendo has four first party Switch games with a Metascore above 90 (out of 100). Super Mario Odyssey and The Legend of Zelda: Breath of the Wild both have a Metascore of 97, with Mario Kart 8 Deluxe and Bayonetta 2 both scoring 92. As we have often said, through our thematic work on the industry, it is compelling content and engagement which drives the eGaming cycle and in the performance of these titles Nintendo has delivered.
On Friday, media outlets reported that the extremely popular Fortnite Game was likely coming to Switch. It was spotted that the game was on a ratings application from publisher Epic Games for the Nintendo Switch platform at the Korean Game Rating and Administration Committee, one of the final steps before launch. The very design of the game is for it to be device agnostic and we know that an Android version is in the works to complement the PC, iOS, Xbox and PlayStation formats. With the unique controller gaming experience of the Switch and the portability option this could end up being a goldmine and accelerate adoption, if it were to happen.
Nintendo's earnings profile remains resilient. The stock continues to enjoy high earnings revisions rankings relative to global equities (Stoxx Global 1800 used in the illustration.
These sector analysis is USELESS!!!!
I am not a pension fund !! I could care less about balance . You are there for making money, not a custodian. Amanda is wrong the vast majority of her trades . And our largest losses from the houses .
I am in the office if you are free to talk.
Paul Barrett
Alpha Group Capital RC
142 W 57th Street, 11th Floor, New York, NY 10019