The Consumer Electronics Show (CES) is a great way to start a year because it’s full of optimism about exciting new innovations and updates of old ones.
Some of the new products displayed at CES are jazzed-up versions of the mundane: a shower head that has Alexa imbedded in it so it responds to voice commands to turn on at a certain temperature, a suitcase that rolls behind a traveler like a dog, and a “smart” refrigerator that knows if it’s time to buy more milk.
Other items introduced at CES—even if they may not be sold anytime soon—are awe inspiring and have the potential to dramatically change the world in which we live. Changing the way people and goods are transported was a major theme of this year’s CES.
Fisker has an electric car run on a solid-state battery that boasts 500 or more miles per charge at a lower cost than current alternatives. Nvidia’s CEO discussed how the company’s chips are in autonomous cars. Ford’s CEO went bigger picture, delving into how cars, streets, and cities could be connected wirelessly to make transportation systems work better—if we are willing to give up some privacy. And Intel’s CEO introduced an autonomous, flying taxi. Hello, Jetsons!
The CES news coverage and strong upward earnings revisions undoubtedly helped propel the S&P 500 Technology stock price index ahead of all other S&P 500 sectors early in the new year (Fig. 1).
Here’s the performance derby ytd through Tuesday’s close: Tech 4.3%, Energy (4.2%), Health Care (4.0), Materials (3.9), Industrials (3.8), Consumer Discretionary (3.5), S&P 500 (2.9), Financials (2.3), Consumer Staples (0.1), Real Estate (-2.5), Utilities (-2.6), and Telecom Services (-3.0) (Fig. 2).
The FANGs (Facebook, Amazon, Netflix, and Alphabet, parent of Google) and a few other tech stocks have performed even more impressively than the Tech sector at large.
Ytd through Tuesday’s close, Facebook is up 4.5%, Amazon.com (7.1%), Netflix (9.0), Alphabet (5.7), Nvidia (14.7), and Tesla (7.2).
The FANG stocks have become increasingly important to the S&P 500, according to Joe’s calculations. FANG shares represented 8.7% of the S&P 500’s market capitalization on January 4, up from 4.0% at the beginning of 2015. The market cap also looks outsized relative to the four stocks’ earnings, which equate to only 2.7% of S&P 500’s earnings and 0.3% of its revenue (Fig. 3). I asked Jackie to take a look at what’s got FANG investors so excited:
(1) Mirror, mirror on the wall. Amazon has Alexa, Google has Assistant, Apple has Siri, Samsung has Bixby, and Facebook has created Portal. Now all of the voice assistants need to be kept busy. CES showcased a raft of products that have assistants imbedded in them. For example, Kohler has a mirror, which when asked, can play music, turn a shower on to a specific temperature, and adjust the brightness of the lights. The mirror uses Alexa and will eventually have Google Assistant as well, a 1/8 WSJ article reported.
Expect to do a lot of chatting with appliances in the near future. A 1/8 Wired article explained: Amazon has “created a new division called Alexa Voice Services [AVS], which builds hardware and software with the aim of making it stupendously easy to add Alexa into whatever ceiling fan, lightbulb, refrigerator, or car someone might be working on. ‘You should be able to talk to Alexa no matter where you’re located or what device you’re talking to,’ says Priya Abani, Amazon’s director of AVS enablement. ‘We basically envision a world where Alexa is everywhere.’” The company has about 50 third-party Alexa devices on the market and seems to have the lead.
Jackie reports, “The importance of voice assistants was clear after I asked my son a question. I would have used my phone’s web browser to find the answer. He immediately asked Siri for the answer. If turning to a voice assistant for information becomes second nature, could it result in the disruption of Google’s web advertising business in 2018?”
Both Amazon and Alphabet have numerous other fast-growing businesses, including Amazon Web Services and YouTube. Amazon shares, up 57.2% y/y, trade at 156.8 times this year’s expected earnings per share of $7.99, while Alphabet’s shares, up 37.1% over the same period, trade at 26.7 times its expected EPS of $41.48. Amazon’s earnings are forecasted to grow by 85.8% y/y, while Alphabet is expected to boost earnings by 28.7%.
(2) Chips, chips everywhere. We’ve long favored semiconductors, which had a banner 2017. The S&P 500 Semiconductors index rallied 33.4% last year, and the Semiconductor Equipment index soared 57.8%, bolstered by strong earnings growth (Fig. 4). The more intelligent inanimate objects get, the more semiconductors they’ll need. Autonomous cars consume vast quantities of data, and it’s likely they’ll be driving in “smart” cities where cars, signs, streets, bikes etc. all will communicate wirelessly.
Two of the semiconductor industry’s titans spoke at CES: Nvidia’s CEO Jensen Huang and Intel’s Brian Krzanich. Nvidia earned its chops designing GPUs—graphic processing units, used to run computer games. While Huang touched on gaming in his CES presentation, he spent more time with Volkswagen’s CEO Herbert Diess, who joined Huang on stage to discuss how Nvidia’s chips would be used in VW’s autonomous, electronic bus. Huang also announced Nvidia’s new partnership with Uber, which is also working on self-driving technology.
When Intel’s Krzanich took the stage, he had to explain how the company planned to patch products that had security flaws. Later, however, he invited Mobileye’s CEO Amnon Shashua on stage together with an autonomous car powered by Mobileye’s technology. Intel bought Mobileye last year for about $15 billion, and the technology is in many of the major auto companies’ cars.
But what was truly imagination-capturing was a video of Krzanich riding in a volocopter—an autonomous, battery-powered air taxi made by Volocopter GmbH. It rose vertically, like a helicopter, but looked like a large drone that had room for two passengers. It uses Intel technology and can be summoned with a cell phone app. Autonomous vehicles, whether driving or flying, require the ability to absorb vast amounts of data, and he who designs the smallest, most robust, and most energy-efficient system will win the day.
The stocks of Intel and Nvidia have had very different years. Intel shares are up 19.2% over the past year, trounced by the 106.9% surge in Nvidia shares. Intel shares trade at 13.4 times 2018 earnings, which are flat y/y, while Nvidia shares trade 47.3 times this year’s earnings, which are expected to grow by 11.9%.
(3) Under fire. The FANG constituents each may have started out perfecting a service or product in their own, unique silos. But CES made it clear that the tech giants, in an effort to attract new eyeballs or keep old eyeballs for longer periods, are forcefully elbowing into each other’s territories.
As we mentioned above, most of the tech giants are peddling their own voice assistants. Many also have jumped into the market for virtual reality headsets. Facebook, for example, bought Oculus, a virtual reality (VR) company for $2 billion in 2014, and at CES it launched its first VR headset for the Chinese market, according to a 1/8 Recode article. Google, the king of search, also has its own VR headset offerings. Meanwhile, Apple, the consumer product company, is reportedly working on an augmented-reality headset.
Entertainment is another area that the tech titans are swarming into in hopes of holding eyeballs for longer periods. Facebook announced it will livestream college basketball games for free this season. Alphabet’s YouTube, Amazon Prime, and Netflix have all gotten into the business of making movies, with Amazon’s Jeff Bezos attending the Golden Globes last weekend. And even Disney has gotten into streaming, with plans to pull some of its content off of others’ streaming services, and instead stream the content directly to customers itself. Dare we say, there’s too much content floating around the Internet.
Were that not enough, some of the largest tech titans have become punching bags for regulators and industry watchers. Facebook has been criticized for “ripping apart society” with addictive programs that make us envious of the perfect lives posted online. Apple came under fire for slowing down the performance of old phones without alerting users and for not helping parents limit children’s use of the phone. Advertisers were up in arms when they realized Google was allowing their ads to share screens with inappropriate YouTube videos last year. And the ultimate knockout punch came last month when the FCC repealed net neutrality regulations, which required communications companies to treat all web traffic the same when distributing and charging for it. Just how this will affect the tech giants may determine whether their outsized stock gains can continue.
Facebook shares have climbed by 50.2% y/y through Tuesday’s close, on par with Netflix’s 59.8% rise. Facebook trades at 28.3 times the $6.63 a share analysts expect it to earn this year, while Netflix’s multiple is 91.0 times this year’s projected earnings. Facebook is expected to grow earnings by 12.8% y/y in 2018, while Netflix is expected to grow them by a much speedier 81.1%. No one said getting older was easy.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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