Ten Investible Things That We Think Will Happen in 2015

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2014 was a relatively quiet year in TMT, with the BABA IPO and the iPhone6 arguably the biggest events for investors. Our 2014 new year’s predictions were more on target than not, with calls for Samsung’s smartphone woes, IP litigation fizzling, deteriorating TV viewership, upside growth in digital ads, the rise of SaaS and the separation of the big 3 IaaS players from the pack all ringing true. Still, AAPL surprised us with the exceptional iPhone6, wireless residential broadband remains an unappreciated future, and S continued to execute like S. We are back with new predictions, listed below, including our top 5 stock picks for 2015: TWTR, TMUS, WDAY, QCOM and AMZN. Our 2014 picks were overwhelmed by the extraordinarily poor performance of S, and while we have certainly taken some risks with this year’s choices, none of them appear to have the potential for an S level disaster.

Surprising new initiatives from big players. GOOG could make big integrating plays in multiple directions – connected home, e-commerce and cross-media advertising seem likely, and a play in the spectrum auctions a possibility. Expect FB to introduce streaming video and for AMZN to get serious about an ad platform. Windows 10 will be a bigger deal than many expect for MSFT. NFLX could add PPV and live streaming, while softening its rhetoric on ads. AAPL had its big announcements in ’14, but look for it to tie them to a broad digital ID concept and an expanded HomeKit in ’15.

The cloud consolidates. The time seems ripe for deals. TWTR, NFLX, EBAY or any of the top private consumer cloud plays could draw serious interest – GOOG and BABA seem likely suitors, with YHOO a wildcard looking to redefine itself with BABA cash. Expect many smaller SaaS companies, both public and private, to be snapped up by enterprise IT players. Meanwhile, the big players on both the consumer and enterprise sides – GOOG, FB, AMZN, and MSFT at the fore – will get bigger.

Broadband reclassified as Title II, panic ensues. DC scuttlebutt suggests reclassification, but even with forbearances, the move would make it easier for the FCC to restrict broadband in the future tainting the prime investment case for cable stocks. Expect vigorous legal and legislative challenges, but the court of public opinion will run against the carriers and we believe “net neutrality” will stick.

TV ad revenue turns over, digital grows up. TV viewership has definitively turned down, and the quality of the audience from an ad perspective has been eroding for years. Meanwhile, advertisers show signs of comfort with digital ads as an alternative, as ad tech appears to finally be delivering on the promise of targeting and tracking. Look for disappointing pricing and volumes at the May TV Upfronts to hit media stocks and for continued strong monetization for digital media – GOOG, FB, and TWTR.

Slow adoption for mobile payments and wearables. The Apple Watch and Apple Pay piqued the attention of the market in 2014, but both wearable devices and mobile payments will be slower to penetrate the market than many assume. Very high Watch margins will contribute meaningfully to Apple profits, but unit volume will disappoint as a lofty price point and a questionable use case constrain demand. Apple Pay, while the best m-payments attempt yet, does not offer enough to either consumers or merchants to drive critical mass adoption and use. Expect a bit of backlash against the hype in 2H15, particularly as Apple comes up against the tough compare of the iPhone6 launch in the fall. Note that we expect the iPhone6 to drive significant upside to AAPL results through at least June.

New digital home concepts get big hype. Connected home devices will get the “wearables” hype treatment in 2015, with moves by GOOG and AAPL to manage entertainment, lighting, security/locks, sensors, thermostats, etc. from an Android or iOS platform. Key to this will be forging alliances with device vendors and breaking the standards logjam. Like with wearables, the likely payoff will be a few years out, but this year’s moves will make the pathway forward and the potential winners much clearer.

Chinese device brands bust out internationally.  Domestic device makers like Xiaomi, Huawei, ZTE and Lenovo have begun to assert their control of the Chinese market, and are poised to move boldly onto the international stage. With low costs, excellent quality/design, and a willingness to compete aggressively for share, we expect these rising players to consolidate share in China and take a significant part of the international market in 2015. This will hurt volumes and prices for traditional device leaders, like Samsung, AAPL, LG and others. It could be surprisingly good news for QCOM, as these established license holders crowd out smaller incompliant Chinese manufacturers, in the wake of an expected settlement with Chinese authorities.

Enterprise cloud migration ahead of expectations, as security becomes a benefit. Hacks on private company data centers (Sony, Target, etc.) are changing perceived risks for CIOs, as moving to the public cloud puts the security onus on someone else with considerably more expertise and shares the potential pain with others. As the transition picks up momentum, the cost and technical advantages of the big three – AMZN, MSFT, and GOOG – will be even more apparent. This is bad for everyone else with aspirations in the IaaS game, and particularly bad for legacy IT vendors with a stake in the private enterprise data center.

SaaS shakeout with big winners and big losers.  SaaS application start-ups are emerging at a furious pace, and many successes are in the IPO queue to join the fast growing players already public. The opportunities are huge, but not all of the players can be successful. We believe 2015 will see a separation between best of breed applications and also-rans. Of particular concern: “me too” apps and older vendors with subscale dedicated data centers that could become a growing cost disadvantage.

Our picks: TWTR, TMUS, WDAY, QCOM, and AMZN. Our 2014 calls were scuttled by S, which dropped 60% over the course of the year. MSFT and STX were strong – up 29% and 23% respectively – while GOOG (-4%) and QCOM (+1%) lost ground to the benchmark. For 2015, we expect TWTR to make a breakthrough on MAUs. TMUS will take surprising share, buy spectrum, and draw M&A interest. WDAY will grow faster and closer to profitability than investors expect. QCOM will settle with Chinese authorities, then benefit as law abiding licensees – e.g. Xiaomi, Lenovo, Huawei, etc. – beat back scofflaws domestically. AMZN will be a back half story as employee retention concerns force Bezos to deliver profit.

For our full research notes, please visit our published research site.

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