Editor's Note: Tech Check is a new Real Money blog on tech stocks. Every trading day, Eric Jhonsa will provide insights and takeaways on major tech stories and trends.
Apple's Subscription Ambitions Seem to Keep Growing
Apple Music claimed 56 million subscribers as of last November. An Apple (AAPL) subscription video service is expected later this year (still no word on how it will be priced and bundled), with a new report from The Information suggesting it's meant to launch around April. And a news/magazine subscription service that's integrated with Apple News and leverages last year's Texture acquisition appears to also be on the way.
Now we have a report from Cheddar stating that Apple began talking with game developers in the second half of 2018 about a service that would "function like [a] Netflix for games." Interestingly, Apple is said to have also "discussed partnering with [game] developers as a publisher," rather than merely licensing titles for the service.
There are still some big unknowns here, from pricing to device support to how (if at all) the service would integrate free-to-play titles that are monetized via in-game purchases (maybe the bundling of in-game currency?). Cheddar says the service "is still in the early stages of development" and isn't guaranteed to launch, so it's possible that Apple hasn't yet decided on those things either.
However, with analytics firm App Annie estimating that games accounted for 74% of global app store spending, there's clearly a large addressable market here. In addition, a subscription service focused on iOS games would give Apple another means for keeping consumers loyal to its ecosystem -- particularly if some developers agree to make their titles iOS exclusives in return for being added to the service, and/or if Apple publishes popular titles on its own.
Microsoft (MSFT) and Alphabet/Google (GOOGL) have game service plans of their own, and Amazon.com (AMZN) was recently reported to be interested in launching its own service. However, both Microsoft and Google's projects involve delivering console-class games via the cloud -- Microsoft's effort is focused on Xbox titles -- and based on what's known so far, Amazon's effort might have a similar focus. With mobile gaming activity skewing strongly towards casual titles, the focus of Apple's service could be very different.
On a macro level, as subscription-management software firm Zuora (ZUO) would be quick to note, launching an array of new subscription services plays into a broader trend of consumers substituting the ownership of both physical and virtual goods for subscriptions. There's plenty of speculation that an "Apple Prime" service that features content subscriptions, AppleCare support and scheduled upgrades for one or more Apple devices will eventually arrive, and it's not hard to imagine how such a service could be popular with consumers already hooked on Apple's hardware and services.
Between its own subscription services and third-party services that it takes a cut on, Apple reported having over 330 million subscriptions in its ecosystem at the end of its September quarter. Though Apple has seen a backlash lately from Netflix (NFLX) and some other content providers over the cut its takes on subscriptions billed via the App Store, the company's total subscription count likely saw additional growth in the December quarter.
Implications for AMD and Micron from Nvidia's Warning
Jan 28, 2018 | 5:21 PM EST AMD (AMD) fell 8% in Monday trading in response to Nvidia's (NVDA) sales warning. With AMD's GPU archrival forecasting its January quarter sales will be about $500 million light, some investors clearly don't want to take any chances ahead of AMD's Q4 report, which arrives after the close on Tuesday.
Near-term expectations for AMD weren't that high to begin with, given the downbeat guidance that both AMD and Nvidia have previously issued. Currently, the consensus is for AMD's revenue to drop 2% annually in Q4 to $1.44 billion, with lower GPU sales (the result of an inventory correction that has followed a plunge in demand from crypto miners) and weaker console processor sales offsetting higher Ryzen and Epyc CPU sales. For Q1, the consensus is for revenue to be down 11% to $1.47 billion.
AMD's CPU and GPU sales are indeed vulnerable to a couple of the issues that were blamed by Nvidia by its warning, and which are also weighing on Intel's INTC sales for the time being: Soft Chinese demand and more cautious near-term spending among major data center clients. Also, it's possible that some would-be buyers of AMD's Epyc server CPUs will now prefer to wait for the mid-2019 launch of second-gen Epyc CPUs promised to deliver twice as much performance per CPU socket as their predecessors.
At the same time, though its sales to cloud giants have risen recently thanks to server CPU and GPU ramps, AMD's data center exposure (as a percentage of revenue) for now appears to be meaningfully lower than Nvidia's. In addition, Nvidia partly blamed its warning on lighter-than-expected sales for its high-end, Turing-architecture, gaming GPUs, as gamers wait to see more games launch that support Turing's real-time ray tracing and AI inference features. That's clearly an Nvidia-specific issue, and one could add here that AMD's GPU sales are believed to skew heavily to the mid-range.
All things considered, AMD's numbers probably won't be great, but might not be as bad as feared in the wake of Nvidia's warning. A lot will probably depend on how cloud orders are trending, and how much of a lift AMD's PC and workstation CPU sales can provide with the help of Intel's PC CPU shortages, the January launch of AMD's second-gen Ryzen Mobile notebook processors and continued momentum for AMD's Ryzen Threadripper workstation/enthusiast desktop CPUs.
Separately, Micron's (MU) shares fell 2.3% on Monday following Nvidia's warning. Micron has long been a major graphics memory supplier to Nvidia, and Nvidia disclosed in its warning that it plans to take about $120 million in charges "for excess DRAM and other components associated with [its] updated revenue guidance and current market conditions."
Micron's stock has certainly priced in a lot of bad news (perhaps too much). But the company can't be thrilled to see the world's biggest GPU supplier writing down its DRAM inventory at a time when smartphone and cloud DRAM orders are also under pressure.
What to Watch as Apple Reports
Here's a preview of Apple's December quarter report, which arrives after the close on Tuesday. I'll be live-blogging the report, along with Apple's earnings call.
Expectations are clearly low following Apple's sales warning. The company's March quarter sales guidance will naturally get attention. Also keep an eye on commentary about iPhone mix, emerging markets demand and Services trends.
Who Wins as Bets on Ad-Supported Online Video Grow
Jan 28, 2018 | 1:10 PM ESTThough it's easy to overlook amid all the attention that Netflix (NFLX) and other ad-free streaming services are getting, quite a few tech, media and telecom firms are showing a strong interest in online services that provide ad-supported TV shows and/or movies.
Just in the last week, we've seen:
- Hulu, which will be majority-owned by Disney (DIS) following the closing of the Fox deal, cut the price of its ad-supported service by $2 to $5.99 month, while keeping the price of its ad-free service at $11.99 per month.
- Viacom (VIA) announce it's buying Pluto TV, a startup that streams thousands of ad-supported movies and shows via live channels and an on-demand service, for $340 million.
- A report from Cheddar stating that T-Mobile US (TMUS) plans to launch an ad-supported mobile video service in the coming weeks.
The news comes two months after it was learned that Alphabet's (GOOGL) YouTube has begun showing a limited number of movies on an ad-supported basis. And it comes three months after Mark Zuckerberg disclosed that Facebook's (FB) Watch video platform, which launched in Aug. 2017, had seen its viewing grow by 200% in the U.S. "in the last few months" (he didn't share specific viewership numbers, however).
There's also Roku's (ROKU) Roku Channel, which provides ad-supported access to a library of TV shows and movies and has become a core part of Roku's burgeoning ad business since launching in Sept. 2017. Amazon.com (AMZN) , meanwhile, has been reported to be working on a similar service for Fire TV device owners -- including owners who lack access to Amazon Prime.
Netflix's management probably isn't losing much sleep over these moves. After all, being ad-free is still a big competitive strength, and many of the aforementioned efforts feel like attempts by companies that can't beat Netflix or Prime Video at their own game to -- by obtaining content via ad revenue-sharing deals rather than big licensing payments -- find an alternate way to profit from online video's growth.
That said, though, the average American adult still spends over four hours per day watching TV (per Nielsen), and a lot of that viewing involves ads. And inevitably, ad-supported online services will feature some popular shows and movies that consumers who are signed up for just a couple of major ad-free streaming services won't have access to.
Throw in the fact that the online video ad market continues to swell as digital ad budgets grow and targeting and measurement tools approve, and there's an opportunity for free, ad-supported services -- even though only some of the efforts being pushed today are likely to succeed.
Roku, which now has over 27 million active accounts to which it can promote the Roku Channel and show targeted ads on third-party TV apps, is likely to be a winner. And between their massive user bases and the reach of their ad networks for third-party sites and apps, it's safe to assume that Facebook and Google will find ways to profit.
The Trade Desk (TTD) , which runs a major independent ad-buying platform, also shouldn't be overlooked. The company's video ad business has seen tremendous growth in recent quarters, and its management has argued that Google's April 2018 decision (due to user privacy concerns) to stop sharing a tracking ID that allowed advertisers to compare the performance of their Google and non-Google ad spend has helped its cause.
Nvidia's Sales Warning Has Both Expected and Unexpected Culprits
Jan 28, 2018 | 12:07 PM EST
While some of the issues blamed for Nvidia's (NVDA) sales warning fit with the numbers and commentary given by peers, the magnitude of its shortfall is definitely surprising.
To recap: Nvidia now expects January quarter revenue of $2.2 billion, plus or minus 2%. That's $500 million below its prior guidance, and implies a 24% annual revenue drop at the midpoint. The outlook is also a full $1.2 billion below where Nvidia's January quarter consensus estimate stood prior to its Nov. 15th earnings report.
Notably, the company doesn't blame the mid-range gaming GPU inventory correction (a product of plunging demand from crypto miners) that was blamed for the outlook it gave in November. Rather, it cites softening macro conditions (particularly in China), a "more cautious approach" to buying among Datacenter segment clients and softer-than-expected demand for Nvidia's new Turing-architecture high-end gaming GPUs, due to gamers delaying purchases "while waiting for lower price points and further demonstrations of RTX technology in actual games."
Nvidia is down 12.6% following the report. AMD (AMD) , whose GPU sales skew towards mid-range products, is down 5.2% ahead of its Tuesday afternoon Q4 report.
Nvidia's comments about Chinese demand fit with remarks recently made by Intel (INTC) , Texas Instruments (TXN) and a few other chip developers, and to some degree also Apple (AAPL) . Likewise, Intel, Western Digital (WDC) have reported seeing a spending pause among the cloud giants who happen to be major buyers of Nvidia's Tesla server GPUs. Intel and Western both forecast cloud demand would pick up in the second half of 2019, and with cloud giants both motivated to grow their capital spending due to secular trends and having the revenue growth needed to finance this capex growth, that doesn't sound far-fetched.
Nvidia's remarks about Turing demand are a little more worrisome, as they contrast with the firm's past remarks and suggest upgrade activity among high-end gaming GPU users will be limited until more games supporting real-time ray tracing and deep learning super sampling (DLSS) -- two features enabled by the new Turing GPUs -- arrive. While demos involving ray-tracing content have been very impressive, showing a level of photorealism that isn't possible using traditional graphics-rendering techniques, a lot of gamers are clearly in wait-and-see mode.
If there's a silver lining here, it's that Nvidia insists its competitive position is unchanged, and there are reasons to take that claim at face value. Nvidia looks well-positioned to continue dominating the high-end gaming GPU market, judging from what AMD has shared to date about its new Radeon VII GPU, and Nvidia's recent launch of its $349 RTX 1060 GPU should boost its mid-range sales. Moreover, the company's R&D investments and developer ecosystem still leave it with a dominant position in the AI training accelerator market, with sales likely to pick up once the cloud spending pause ends.
Nvidia also has growth opportunities in other areas, such as professional content creation, autonomous driving and AI inference. But given the size of its sales warning, as well as the factors blamed for it, it wouldn't be surprising to see its stock remain volatile in the short-term.
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