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September 2017

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Although the long term story remains strong as ever, Q1 results might come as a surprise to most

Facebook (NASDAQ:FB) investors are expecting flying colors as Q1 results approach. However, contrary to the general perception, Ross Sandles, analyst at Deutsche Bank, has warned investors and stakeholders to tread carefully ahead of Q1 earnings call. He advises investors to position themselves for upcoming weakness as Mr. Sandler’s model points towards a humble Q1 earnings profile.

The analyst remains a believer in FB stock over the long term and advises that investors should buy on weakness following Q1 results as the stock is likely to trade in sympathy following below par earnings. He added that Facebook has now become a stock that everyone expects more from and has contributed to heavily positive sentiments coupled with skyrocketing quarterly revenue expectations. Given the recent channel checks, Deutsche Bank expects unfavorable results followed by overreaction.

The analyst traced back the sources of his skepticism regarding Q1 revenue to Q4s growth being an extrapolation (out of ordinary) in an otherwise stable growth function. The $5.06 billion estimate at Deutsche Bank suggests a 53% yearly growth in advertisement revenue which is slightly below estimate. However, the analyst sees a potential downside risk to this estimate as the trends are likely to come down in normal ranges. Most expectations at the moment are based on Q4s extraordinary numbers which are highly unlikely to come true.

Channels checks revealed mix data with strength in travel and weakness in some channels including, retail and agency. Experimental Direct response advertisement campaigns at Instagram are positive but not enough to impact overall growth. The analyst expects Facebook EPS to come in at $0.62 with EBITDA of $3.17 billion given the OPEX guidance and flat margins expectation. The analyst sees Q1 as slightly weaker than other quarters but the long term dynamism remains strong.

The analyst opinion on Facebook stock has 18 strong Buy, 29 Buy, three Hold and one Underperform rating. The stock is currently traded at $114.68 in the final hour of premarket session.

Apple has announced plans to open a new R&D centre in Shenzhen to work closely with its manufacturing partners

Reuters reports that Apple Inc. (NASDAQ:AAPL) will open its second R&D centre in China in the southern city of Shenzhen in 2017. This will further strengthen relations between Apple and China, which is an important growth market for the tech giant which already employs 100,000 people in the city.

The Beijing R&D centre was geared by political motives, but the Shenzhen centre is aimed to provide manufacturing feasibility in the initial stages of product designing. The Shenzhen centre was announced by Tim Cook, the CEO of Apple in the presence of local officials in a national innovation summit. This summit was attended by Communist Party Secretary of Shenzhen Ma Xingrui and his deputy, Mayor Xu Qin.

Shenzhen is a bustling metropolitan well known for producing high technology goods. Apple aims to manufacture hardware in the city as well as nurture local software developer talent with the new centre.

Cook claims that Shenzhen has advanced a lot since he last visited the city 20 years ago and is now one of the biggest manufacturing hubs of the world. Shenzhen factory processes and quality control is imperative to the success of Apple’s product lines.

Shenzhen’s significance as a manufacturing centre for Apple roots from the city being China’s first Special Economic Zone. This will allow investments by foreign companies without advance approval from the Chinese government. Moreover, tax incentives will be provided to the companies. Hence, these reforms have made Shenzhen manufacturing home to many tech giants.

Apple spokesperson Josh Rosenstock has expressed his excitement of having Shenzhen onboard and anticipates that the relations between Apple and China will be further strengthened. Apple plans to establish relationships with universities as well to harbor talent development and open more retail stores in the country.

Apple’s incentive to partner with China may also be in response to falling revenues in China. Last quarter saw a decline in revenue by 33% along with stagnant iPhone sales. The slowdown can also be due to affordable Android phones of rivals like Huawei Technologies and Vivo, capturing more and more percentage of the Chinese market.

Multiple expansions likely in the near term owing to restructuring of the reporting segments

International Business Machines Corporation (NYSE:IBM) has reorganized the reporting segment which RBC believes will provide investors deeper insight into revenue disclosures adding value to business. The restructuring of the segments will mostly affect the software segment revenue.

The restructuring will break the software revenue segment down into three additional sub segments. The three sub segments are named, Cognitive Solutions, Technology Services and Cloud Platforms and Systems. As evident, the three are in themselves technically vast disciplines and it is only logical to divide them as such for the sake of simplicity and clarity.

The revenue related to Transaction Processing software, banking software, Security Software, and general commerce and analytical software will now be represented on the income statement under the name of cognitive solutions. This sub-segment largely inherits the structure of old software segment along with most of the products. The revenue reported under this segment for the year 2015 amounted to $17.8 billion with a decline of 3% excluding forex impact. Cognitive Solutions has now become the most profitable segment for IBM with margins exceeding 85% for the year 2015.

Technology Services and Cloud Platform now encompasses IBM cloud integration software suite revenue and Global Technology services and will be showcasing the revenue combined from the two sources on the income statement. This division will help keep track the growth of the cloud segment which has become the most crucial growth area for large cap technology stocks. The revenue for this segment was $35.1 billion for 2015.

Systems segment will now cater revenue from hardware and software that relates closed with hardware such as BIOS and Operating Systems. The new classification has got the approval of many analysts including Amit Daryanani of RBC Capital who has now raised his price target to $155 from $135, with Sector Perform rating. The analyst opinion for IBM stock has two strong Buy, four Buy, 13 Hold, five Underperform and one sell rating. The stock closed at $151.48 yesterday.

SunTrust probes into merger and acquisition possibilities for Twitter

Twitter Inc (NYSE:TWTR) failed to deliver according to the expectations of its shareholders and now looks for possible strategic alternatives in order to maximize shareholder value. SunTrust Robinson Humphrey analyst explores the possibility of a merger and studies the synergies that may result in the aftermath. According to the analyst, Facebook and Google are best possible merger targets as the synergies with their core business are relatively high and could be very meaningful in terms of growth.

Twitter has lately struggled to drive any meaningful growth and the number of monthly actives users have not grown according to the expectations. The core business has also been exposed to harm and the advertisers have lost faith in the platform, as the revenue from the platform decelerated. Twitter has employed several new strategies and introduced new features in order to provide better ad targeting mechanism, but it has been of little help.

The analyst believes that Google is currently the best merger target for Twitter, and assuming its liquidity profile, it is currently in a very strong position to purchase the company. Twitter’s online advertisement business will also have great synergies with Google’s advertisement platform. Assuming the current number of employees in Google’s sales team, it constitutes for an optimal scenario.

Google could also help with better pricing and targeting of advertisements to regain the trust of the market. It will also have General and Administrative expenses synergies with Twitter enabling the stock to get more benefit than what has been bargained for. YouTube will also likely synergize well with Vines and short videos.

Assuming the liquidity, Google could seek to acquire TWTR for cash consideration and given the 45% growth expectation for the next year, it might very well become a reality. The analyst opinion for the stock has 4 Strong Buy, 8 Buy, 25 Hold, 4 Underperform and 2 Sell ratings. The stock now trades at $17.31 with appreciation of 2.34% since the opening.

Jefferies believes United Technologies still has earnings growth potential despite lower Geared Turbofan engine deliveries

Today, Jefferies released view on the business update provided by United Technologies Corporation (NYSE:UTX) CEO, Greg Hayes. This update was provided on September 16, 2016 during Mr. Hayes speech at Morgan Stanley Laguna Conference.

The research firm noticed that for most of the part, there was no change in FY16’s outlook. The company has increased its baseline expectations for sales and EPS from a range of $56-$58 billion to $57-$58 billion and $6.3-$6.6 to $6.45-$6.6, respectively. Commercial aircraft spares are still up 20% year-over-year, but Geared Turbofan (GTF) engines’ shipments are likely to touch 150 units only, which is not a major surprise for the market. While keeping the aforementioned developments along with the risk attached with the emerging market’s growth, GTF cost, and segments restructuring, the research firm reiterated Buy stance for the company stock with $118 target price.

Issues with GTF Engines

As the company projected lower GTF deliveries for 2016, the research analysts projected reversal in 2017. In this regard, the firm bullishly projected these deliveries to touch 450 units as against the company’s anticipation of 350 units. The reason of the company’s lower GTF delivery projection for 2017 is the possibility of missing out 20-25 Airbus Group’s (OTCMKTS:EADSY) A320 engines in 2017. These planes might be powered by the V2500 engine, which is designed and manufactured by International Aero Engines – a joint venture of Pratt & Whitney, Japanese Aero Engine Corporation (JAEC) and MTU Aero Engines. The top management of United Technologies also indicated that it would be at a shipment rate of 70 units in 4QFY16. A 25% increase in the run-rate would lead to 350 deliveries for 2017.

Impact on Revenue

Jefferies’ research analysts foresee that by the year-end CY16, the revenue impact amid the aforementioned discussion could be in the $80-$100 million range. While the absence of the losses associated with the shipments would be a plus, the lower yields and the payments for delays probably offset this benefit. Moreover, the improved spares volume and the better ability to monitor engine-operating costs in the field are expected to lead to an improved cost structure. Additionally, the ongoing restructuring process is also likely to reduce cost while increase profitability.

TCC takes a look at a possible turnaround that Chevron might see

Chevron Corporation (NYSE:CVX) failed to impress stakeholders as it reported an annual loss for the first time since 1980. The more than 50% decline in crude oil prices weighed in on the company’s results and gave a disappointing picture to its shareholders.

Now, the question that remains is whether the company’s results would continue to come below expectations in the future or will the company be able to turn things around.

We believe the company in 2016 took a shift in its strategy. Unlike other exploration and production companies, Chevron shifted its focus to an extent to gas. The company launched two major liquefied natural gas (LNG) projects in Australia in the form of Gorgon and Wheatstone. With the focus towards cleaner and safer alternatives, the projects in Australia may offer the company something to rejoice in the upcoming years.

In addition, despite an yearly loss, the company did not perform that bad in the latest quarter. Although revenue and earnings failed to come in line with expectations they weren’t that bad. Revenue was up 7.7% when compared to the same quarter last year while earnings were converted from a loss of $588 million from 4QFY15 to a profit of $415 million.

Chevron, in addition,  has also managed to curb its costs by laying off employees and cutting back on its capital expenditures. As reported by Bloomberg, analyst Brian Youngeberg said: “After the 2016 loss, Chevron probably will be able to cover all of its costs this year with cash flow and generate excess cash as soon as 2018.”

Chevron also has a promising position in the Permian basin and most analysts feel it to be a promising area for the company. The area is expected to be the company’s driving point for production till 2025. John Watson, CEO of Chevron, regarding the results and the company’s future performance said: “Our 2016 earnings reflect the low oil and gas prices we saw during the year.”

He added: “We responded aggressively to those conditions, cutting capital and operating expenses by $14 billion. We are well positioned to improve earnings and be cash flow balanced in 2017 through continued tight spending and cost control and additional revenue from expected production growth.”

The console is likely to be priced as a premium console

Microsoft Corporation’s (NASDAQ:MSFT) Project Scorpio is the third member of the Xbox One console family. The console debuted alongside the Xbox One S during E3 2016 and is intended to push console segment to 4K gaming with its six teraflops worth of power.

It is Microsoft’s step towards the new “gaming without generations” strategy. Unlike previously where the software giant followed the traditional console lifecycle of five to six years, it will now follow a model that resembles with the cellphone industry. Speaking to DualShockers in an interview, Aaron Greenberg expressed that he is excited about bringing six teraflops of GPU power to the console space.

“We were really thoughtful about the specs we used to design Project Scorpio, and the focus was on how we can deliver true 4K gaming in the console space” – Aaron Greenberg

According to him, Microsoft is “confident” that Project Scorpio will be able to deliver native 4K gaming. The added benefit to bringing such capabilities to the console space is that Microsoft doesn’t have to put a lot of effort in making 4K experiences. Games such as the upcoming Gears of War 4 and Forza Horizon 3 feature 4K visuals on PC, so it is only a matter of supporting the games on the upcoming console.

4K gaming is something even PCs have yet to fully embrace as a mainstream resolution. Such power in a box is not going to come cheap. Microsoft is treating Scorpio as a “premium product,” so expect the console to be priced accordingly. The Xbox One S retails for $299 and it may be possible for Microsoft to introduce another price cut by the time Scorpio launches during Holiday 2017. Despite being a “very high-end product,” Microsoft wouldn’t risk pricing Scorpio so expensive that is discourages buyers.

Sony Corp. (ADR) (NYSE:SNE) is taking a similar approach with PlayStation 4 NEO. But Sony’s console is a lot tamer when compared to Microsoft’s ambitious project.

Facebook Inc stock has a potential to yield high risk adjusted returns

Facebook Inc (FB) stock is one of the strong performers in the market and is expected to continue its momentum in the year 2016. The company’s market value is up by 35.27% in one year’s time and has experienced a surge of 34.57% in comparison to its online advertising competitor Alphabet Inc (GOOG)’s market value, which is quite impressive. The analysts are expecting that virtual reality headset, Oculus Rift, is going to be a reason for the boost in the growth of Facebook in the current year.

In the year 2016, the market value of Facebook is up by 3.62% year-to-date (YTD) while NASDAQ was down by 8.49% in the same period. Moreover, there is a drop in Dow Jones and S&P 500 index by 4.08% and 4.17% YTD respectively. Facebook stock has an average daily trading volume of 46.02 million and a 52 week range of $72-117.59.

The company’s stock is a high beta stock which means it can move in any direction more than the other low beta stocks in a specific scenario. In the recent downtuof the market where other high beta stock like Twitter Inc (TWTR) and LinkedIn Corp (LNKD) were adversely affected, Facebook stock not only survive but outperformed the market, making its existence more prominent. This shows that the social media giant’s stock has a potential to yield high risk adjusted returns and is stable enough to get through volatile and uncertain situation prevailing in the market.

Although Facebook Inc stock has performed well so far, there are speculations in the market that the stock will not be able to maintain its momentum for long. The analysts also believe that it will be tough for the company’s management to sustain its stock price at high levels. To deal with this situation wisely, Tim Biggam of Delta Derivatives suggests the investors to sell the April 115/120 call spread for $0.70.  According to him, the deal is profitable as the seller will ea$0.70 if the Facebook stock price remain under $115, which is most likely.

Facebook’s stock has a consensus price target of $133.49 with an average rating of Outperform. This consensus views were achieved through 45 brokerage firms’ suggestions for company’s stock. The highest recommended price target for Facebook stock is $170, while the lowest stand at $71. Facebook’s stock is trading at $108.68, up by 0.56% in pre-market hours on February 26.

With this new battery update, Tesla will likely double the energy capacity of Powerwall 2.0, scheduled to be unveiled later this year

At the Gigafactory’s grand opening, Tesla Motors Inc. (NASDAQ:TSLA) revealed that it will produce new cells with “21-70” format which would be 21 mm in diameter and 70 mm in height at its li-ion battery plant, compared to the current “18-65” format. These cells will have higher energy density leading to costs reduction in terms of kWh.

Tesla CEO Elon Musk and CTO JB Straubel said that the new cells will initially power the Model 3 and Tesla Energy products, and eventually the Model S and the Model X. Electrek confirmed (via anonymous sources) that the new 21-70 cells will be the first ones to be used in the Powerwall and Powerpack station storage systems.

The sources also disclosed that the cells are making their way to the second-generation Powerpack, which is currently being prepared for launch by the end of this year; it would be called “Powerpack 2.0.” Thus, the new commercial storage system’s energy capacity would be doubled, thanks to the new 21-70 format.

A Powerpack unit currently has energy capacity of 100kWh, while the sources claimed that the available energy is about 95kWh. However, the Powerpack 2.0 will be able to store 200kWh of energy. While the battery pack size will relatively remain the same, energy density will significantly improve for the Powerwall and Powerpack, which currently have lower density with the 18-65 cells.

Apart from the improvement in energy density, Tesla plans to replace the Dynapower inverter with its own inverter, likely in collaboration with SolarCity. They would be called “Tesla Inverter,” according to Electrek.

The Powerpack 2.0 will significantly reduce cost as it would require half the units previously required for a system, the publication highlighted. The company announced an 80MWh project with Southern California Edison last month, which would require 400 Powerpacks, instead of the previous projection of 800 Powerpacks.

The report comes soon after Tesla reduced prices for its Powerpack and inverters, while increasing prices of cables and hardware. This could have been done with an expectation that the new Powerpack and inverters would save costs.

Tesla plans to unveil new Tesla Energy products, as well as solar roof and a new Tesla charger at an event scheduled for October 28 in San Francisco. Since Mr. Musk did not mention about the Powerpack 2.0, the product will be either unveiled at a later date.

With September being a month of GGR growth in Macau, The Country Caller evaluates if Las Vegas Sands and Wynn Resorts can keep up the momentum

For the month of September, the Gross Gaming Revenue (GGR) in Asia’s only legal casino hub – Macau, grew more than the expectations. The Gaming Inspection and Coordination Bureau of Macau reported a GGR of 18,396 million MOP (Macanese Pataca) during September, which rose about 7.4% in comparison to 17,133 million MOP reported in same month of the previous year.

The rise in GGR can surely be attributed to the efforts of United States-based casino and resort operators Las Vegas Sands Corp (NYSE:LVS) and Wynn Resorts Limited (NASDAQ:WYNN). The two companies have subsidiaries in the Macanese region, going by the name of Sands China and Wynn Macau respectively. The two companies had been working in full swing in order to turnaround the financial turmoil in the region and both of them opened new resorts in the region recently.

Sands China’s Parisian Resort, having a replica of the iconic Eiffel Tower debuted last week and is located at the famous Cotai Strip – a place crowded with visitors in Macau. On the other hand, Wynn Macau opened gates of the new Wynn Palace for tourists.

The region is in a transition of transforming itself into a tourist destination following the orders by Chinese President Mr. Xi Jinping. The president ordered the city’s government to diversify its economy from gambling in late 2014, hence the policies introduced created a huge turmoil and scared-off VIP gamblers leading to tanking revenues. Therefore, in attempts to counter these policies and marred top-line performance, the companies started building resorts with more non-gaming entertainment facilities at Macau’s Cotai Strip.

Recently, news emerged that the casino industry of the region may be preparing itself for a visit by the Prime Minister of China, Li Keqiang. Grant Govertsen – a Macau based analyst at Union Gaming, believes that the visit by the Premier may threaten the nascent recovery by the gaming industry. He further elaborated that the high-end of the market may be the prime victims of the impact.