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AMD And CTS Labs: A Story Of Failed Stock Manipulation

On March 13th, 2018, CTS Labs announced that they have found no less than 13, yes, count them, 13 vulnerabilities in AMD’s (AMD) Ryzen and EPYC architectures. To back up this claim they have had their findings reviewed by not less than ONE, yes, just one, company, Trail of Bits. To further bolster their claim they have produced one, yes, just one, screenshot of one affected machine where the boot code in the bottom left coroner was replaced with the number “1337.” These findings caused Viceroy Research, another firm with a questionable reputation, to proclaim in a 25-page report on the matter that:

AMD must cease the sale of Ryzen and EPYC chips in the interest of public safety.

In this article we are going to look at the claimed vulnerabilities, discuss the level of threat these vulnerabilities pose to AMD’s customers, and then take a closer look at who’s behind CTS Labs.

The Vulnerabilities

A few months ago Google (NASDAQ:GOOG) (NASDAQ:GOOGL) researchers in conjunction with independent security researchers published the Meltdown and Spectre vulnerability research paper. That paper was a pleasure to read, though it was very tough to understand, it was peer reviewed, and came with discussion of methodology and proof of concepts. I wrote an article entitled “Intel And The Meltdown And Spectre Vulnerabilities Explained” discussing these vulnerabilities.

By contrast CTS’ white paper, which can be found on amdflaws.com, and yet inexplicably hosted by a blank website safefirmware.com, discusses no methodology at all, and for proof of concepts discussed therein offers just one screenshot of a server with a boot screen with “1337” (hacker slang for LEET which is phonetic shortening of ELITE) added to the bottom right hand corner, purportedly by CTS. Due to the lack of any discussion of methodology or technical details in the white paper it is impossible to verify the veracity of CTS’ claims. That said, let’s discuss them at face value anyway and see what the worst-case scenario could be.

CTS loudly claims that they have found no less than 13 vulnerabilities, but in actuality they discuss four vulnerabilities with several vectors for each. These are Ryzenfall, Fallout, Chimera and Masterkey. Because so little actual information is provided in the white paper I will simply quickly sum up these vulnerabilities here as best as I can.


(Screenshot from CTS’ white paper. This is the one and ONLY proof of their exploit in action. What you see above is the BEST evidence proffered by CTS.)

AMD’s EPYC and Ryzen processors come with a secondary secure processor on board, an ARM Cortex A5. This processor is used for various low-level security features of the CPU. The claimed Masterkey vulnerability would allow arbitrary code execution within the secure processor which would allow an attacker to disable the Secure Encrypted Virtualization feature or bypass the Firmware Trusted Platform Module.

However, in order to deploy this vulnerability the attacker would have to first get access to the computer, then gain root or administrator privileges, and then finally have the ability to flash (update) the BIOS on the computer. With that level of access it’s hard to imagine what an attacker would NOT be able to do on any modern computer system, whether from AMD, Intel (NASDAQ:INTC), or any other company.


Similarly Ryzenfall targets AMD’s Secure OS, the OS that’s running on the ARM Cortex A5 secure processor. It requires the attacker to have access to the system, administrator or root privileges, and a copy of a signed driver with the exploit code inside the driver.

According to CTS’ white paper:

“Although Secure OS runs inside the Secure Processors dedicated ARM Cortex A5 processor, it does make use of the computers main memory. When Secure OS starts, it allocates a portion of main memory for its own use and seals it off from the main processor. This area is called Fenced DRAM.”

The vulnerability allows access to this “Fenced DRAM” which is generally supposed to be inaccessible to kernel drivers and user programs. This is, in my opinion, a more serious vulnerability. Though actually executing this vulnerability in the wild would entail finding a friendly OEM willing to sign your malicious code and include it in their drivers, this is not entirely outside the scope of possibility.

That said, it is important to note that even the CTS’ white paper mentions that AMD has already included a BIOS option to disable the Secure OS feature, as it’s not necessary for regular server or desktop operation. Further, since the ONLY shred of proof was provided in the Masterkey section, it’s not entirely clear if it’s even real. To avoid repeating myself, the same goes for Fallout and Chimera.


Fallout uses the same attack vector of a signed driver as Ryzenfall, but on an EPYC processor by targeting the boot loader, with identical results, and identical dubiousness of the proof of concept.


Chimera is the most serious sounding “vulnerability.” It is described by CTS as:

“An array of hidden manufacturer backdoors inside AMD’s Promontory chipsets. These chipsets are an integral part of all Ryzen and Ryzen Pro workstations.”

CTS bases this bold supposition NOT on actual testing, or proof of concept, but on the fact that they claimed to have reviewed the code from AMD’s subcontractor, ASMedia, and AMD’s chipset code and found similarities between the two code bases. ASMedia reused some of their own code while fulfilling a contract for AMD. What a shock?

Further, CTS makes the claim that because ASUS, the parent company of ASMedia, has been fined by the FTC for having insecure routers, yes, not chipsets, but consumer grade routers, everything ASMedia does simply MUST be vulnerable. Yes, a subsidiary of ASUS with no relationship to their router division must necessarily be tainted by an FTC investigation into a completely unrelated product line to the chipset in question. You can read more about the ASUS FTC settlement here, and judge for yourself if there’s anything to CTS’ claims.

Even Dan Guido, the CEO of Trail of Bits, the one and only company hired by CTS to double check their findings, disputes the validity of Chimera in a tweet to reporters.

(Screen shot from twitter.com.)

Further, ExtremeTech published an article where they show that the same ASMedia chips accused of housing backdoors by CTS also are widely used on any ASUS motherboards with Intel chips. So, why is this categorized as an AMD flaw when it widely affects, if real, both AMD and Intel?

Summary of the Vulnerabilities

While some of these vulnerabilities might be real, all of them require an extraordinary level of access to the system. We have consulted our internal technology experts, and we contacted Ilia Luk-Zilberman, the CTO of CTS Labs, to inquire if any of the detailed vulnerabilities could be used from within a virtualized container (VPS). Our own experts believe that NONE of the above mentioned vulnerabilities can be exploited from a VPS. Mr. Zilberman did not respond to our inquiry. This is important because if these vulnerabilities are not exploitable from within a VPS, they should not be a significant concern for large-scale cloud providers.

If Fallout and Ryzenfall are indeed real, hopefully AMD will patch them quickly, as those threaten AMD’s Secure Encrypted Virtualization system. Chimera just looks like nonsense, unless further proof is provided, and Masterkey requires a BIOS flash. If you can flash the BIOS all bets are off, on ALL systems, from ALL CPU vendors.

CTS Labs and Viceroy Research

So now that we talked about the message, let’s shoot the messenger. In this case two of them, CTS Labs and Viceroy Research.

CTS Labs’ approach became immediately suspicious because of the manner and timing of their disclosure. Rather than giving AMD a standard 90-day advance notice adopted by Google, Cisco (NASDAQ:CSCO) and others, or the 200-day-plus notice Google gave Intel, AMD, and others before disclosing Meltdown and Spectre, CTS gave AMD less than a day advance notice.

So, what is CTS Labs? Well, that’s the problem, not much is known about them. We know a few things. For instance we know that the domain for their main website was registered in June 2017, less than a year ago.

(Screenshot of whois command output in terminal taken by Zynath Capital.)

We also know that even though they are “security researchers” they are inexplicably incompetent enough to not turn on HTTPS on their own website. We also know that all of the video footage of the two guys running CTS Labs was faked with green screen.

(Screenshot from Reddit thread by Type-21.)

Finally we know that most of the technical information on their website was directly copied and pasted from “Hardware Threat Landscape and Good Practice Guide.”

(Screenshot of cts-labs.com and Hardware Threat Landscape and Good Practice Guide open side by side with identical text highlighted, by Zynath Capital.)

I can keep going, but by now it should be evident that CTS Labs generally does not inspire trust. So instead I’ll just finish this with a quote from Linus Torvalds, the creator of the Linux Kernel, on the subject of the CTS Labs report:

I refuse to link to that garbage. But yes, it looks more like stock manipulation than a security advisory to me.

Now that we talked about CTS Labs a little, let’s look at Viceroy Research, the most vocal investment company that immediately proclaimed AMD is as good as bankrupt after CTS Labs’ report came out. There’s no stated connection between CTS Labs and Viceroy Research, but the timing of the disclosure by CTS and the report published by Viceroy raises some questions.

Almost immediately after the publication of the CTS report, the independent Viceroy Research analysts managed to read, understand, verify, write, proofread, style, and publish, with graphics and all, a completely independent 25-page report on AMD, proclaiming that AMD is as good as bankrupt. Yes, they managed to do all of that high-quality, completely independent work immediately after the CTS report came out. Either they are some of the best analysts in the world with a telepathic connection with their word processor, or perhaps they have had advance copy of the CTS white paper. You be the judge.

UPDATE: John Perring from Viceroy Research confirmed that he received a copy of the report via an anonymous source before it was widely published.

We have attempted to contact Jessica Schaefer from Bevel PR, the listed PR firm on the vulnerability disclosure website, only to be greeted by a full voicemail inbox. We attempted to contact both Bevel PR and CTS Labs by email and inquire about the relationship between CTS and Viceroy, and provided them with ample time to respond. They did not respond to our inquiry.

So, let’s look at Viceroy Research. According to MoneyWeb Viceroy Research is headed by a 44-year-old British citizen and ex-social worker, John Fraser Perring, in conjunction with two 23-year-old Australian citizens, Gabriel Bernarde and Aidan Lau. I wonder which of these guys is so fast at typing. Viceroy Research was the group responsible for the uncovering of the Steinhoff accounting scandal, about which you can read more here.

After successfully taking down Steinhoff, they tried to manufacture controversy around Capitec Bank, a fast-growing South African bank. This time it didn’t work out so well. The Capitec stock price dropped shortly and quickly recovered when the South African reserve bank made a statement that Capitec’s business is sound. Just a week ago Viceroy attempted to do the same thing with a German company called ProSieben, also with mixed success, and in alleged breach of German securities laws, according to BaFin (similar to the SEC).

Now, it appears they are going after AMD, though it looks to be another unsuccessful attack.

Investor Takeaway

After the announcement of this news, AMD stock generally traded sideways with slight downward movement not uncommon for AMD in general. Hopefully this article showed you that CTS’ report is largely nonsense and a fabrication with perhaps a small kernel of truth hidden somewhere in the middle. If the vulnerabilities are confirmed by AMD they are likely to be easily fixed by software patches. If you are long AMD, stay long. If you are looking for an entry point, this might be a good opportunity to use this fake news to your advantage. AMD is a company with a bright future if it continues to execute well and we see them hitting $20 per share by the end of 2018.

Disclosure: I am/we are long AMD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I Expect 67%, 98%, And 110% Gains From This Sector

Have you ever “unplugged” from your cell phone? If you have, you’ve likely experienced the phenomenon of phantom vibrations — the perception that your phone is ringing or vibrating when in fact it’s not. (In the 1990s, people reported incidences of “phantom pager syndrome.”)

We’ve become so accustomed to being “connected” that for many it controls our lives. My cell phone is the first thing I reach for in the morning (and usually the last thing I’ve touched before falling asleep). I can turn on and adjust the music streaming through my Sonos speakers, my Apple TV, and my heat and air conditioning. Heck, nowadays you can use your smartphone to lock and unlock your doors, control your lights, open your garage, start your car… I even use it to track the internal temperature of whatever meat I’m smoking.

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There’s really not much you can’t do with your smartphone these days. But the smartphone is only the tip of the iceberg. We now have “smart speakers” like Amazon’s (Nasdaq: AMZN) Echo, or “Alexa,” which, of course, plays music, but can do so much more. With a simple voice command, Alexa can turn on your lights, adjust the thermostat, and even purchase items online.

Amazon isn’t the only player in this game but they have a good head start, having sold more than 30 million Amazon Echos. Alphabet (Nasdaq: GOOGL) has its own line called Google Home, of which an estimated 14 million units have been sold, and now Apple (Nasdaq: AAPL) has entered the market with its HomePod, which it started delivering last month.

All of these smart devices are part of a bigger trend known as the “Internet of Things.” And this trend has massive tailwinds that go far beyond just phones and speakers. Things like washers, dryers, refrigerators, vehicles, parking meters, heart-monitoring implants, and wearables like watches, glasses and clothing — all these and more will be connected to the Internet.

The stats and forecasts for this industry are mind-boggling. Gartner, the technology research and advisory firm, predicts that more than 20 billion devices will connect to the internet in 2020. That’s up from roughly 8.4 billion at the end of 2017 — an increase of more than 140% in only three years.

This movement has done wonders for the technology sector… Consider this: the widely tracked Technology Select Sector ETF (NYSE: XLK) has returned 223% (more than double the S&P 500) since June 29, 2007 — the release date of the first Apple iPhone, which is arguably when smartphones became broadly adopted.

To help put this into perspective, from XLK’s inception date, December 16, 1998, until the first iPhone was released, the ETF lost 11% over that 8.5-year stretch, while the broader market returned 30%. But since then, it’s soared triple-digits and outpaced the S&P 500 by a staggering 139 percentage points.

My Maximum Profit subscribers and I have done well in this industry. Using our proprietary system designed to maximize gains and minimize losses, we booked gains of 67% from Applied Materials (Nasdaq: AMAT) in 15 months, roughly 98% from STMicroelectronics (NYSE: STM) in a little over 12 months, and 110% from Tower Semiconductors (Nasdaq: TSEM) in 15 months, to name a few.

And thanks to the Maximum Profit system, we knew exactly when to buy and when to sell each time.

But here’s the thing: my system is indicating that this industry still has plenty of momentum behind it.

That’s why we recently picked up two companies from this corner of the market, but they come from opposite ends of the industry. One is helping propel the Internet of Things movement, while the other is helping protect consumers of the internet.

The point is, if you’re not looking into this sector for gains in this market, you’re seriously missing out.

P.S. If you’re interested in making this kind of money with runaway stocks, I strongly recommend you give my premium service, Maximum Profit, a risk-free trial. That way, you’ll have a winning system that uses proven fundamental and technical indicators working for you. You’ll no longer have to worry about what to buy, when to buy — or when to sell. Simply let Maximum Profit do the work for you. To learn more, simply follow this link.

Hot Bank Stocks To Buy For 2018

BlackBerrys stock touched two-year highs of about $11.50 in early June after it won a surprise $940 million arbitration award relating to a dispute with Qualcomm. However, the stock has declined by over 20% since then, presently trading at levels of under $9 per share. Below we take a look at some of the factors that may have resulted in the selloff.

Trefis has a $9.50 price estimate for BlackBerry, which is slightly ahead of the current market price.

BlackBerry has been banking on its software business to drive growth, but its progress appears to have slowed down in recent quarters. During fiscal Q1, software and services revenues declined by about 12% on a sequential basis to $160 million, while its total number of customer orders also declined by about 6%. BlackBerrys overall revenues have also been trending lower, amid sharp declines in both the service access fee business and the shift from a manufacturing to a licensing model in the smartphone operations. The company is expected to see its lowest-ever levels of revenue during Q2 FY18 (quarter ending August 2017), with the market consensus standing at around $221 million, compared to revenues of around $334 million in the year ago period. BlackBerry has been betting on areas such as fleet tracking and automotive technologies, announcing small acquisitions or partnerships from time to time. However, there has been little news on this front over the last quarter, and there remains little clarity as to how BlackBerry can compete at scale with rivals such as Verizon in the fleet tracking space and Tesla and Google in the automotive tech space. Analysts at Goldman Sachs also resumed coverage on the stock earlier this month, issuing a sell rating, noting that BlackBerrys enterprise mobility management offering could face more competitive pressures, as rivals such as VMware and Microsoft bundle their EMM with other products. This likely hurt the sentiment surrounding the stock.

View Interactive Institutional Research (Powered by Trefis):

Hot Bank Stocks To Buy For 2018: RenaissanceRe Holdings Ltd.(RNR)

Advisors’ Opinion:


    RenaissanceRe Holdings (RNR) is a global provider of reinsurance, as well as various types of insurance and related services. The company was founded in 1993 and is headquartered in Bermuda, notes Jack Adamo, editor of Insiders Plus.

Hot Bank Stocks To Buy For 2018: Alphabet Inc.(GOOGL)

Advisors’ Opinion:

  • [By Elizabeth Balboa]

    Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), Amazon.com, Inc. (NASDAQ: AMZN) or Facebook Inc (NASDAQ: FB) could join fellow FAANG juggernaut Apple Inc. (NASDAQ: AAPL), on the list, increasing the Dow’s overlap with the SPDR S&P 500 ETF Trust (NYSE: SPY) and better aligning the Dow with the S&P 500’s tech representation.

  • [By Danny Vena]

    Those gains have been driven by NVIDIA’s graphics processing units (GPUs), which were the top choice for training AI systems. Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) division Google has been at the forefront of AI development with its Google Brain and, later, with its acquisition of Deep Mind, both specializing in the area of deep-learning neural networks. It’s also been a big user of NVIDIA’s GPU’s. Now recent developments at Google may be about to change the status quo and put NVIDIA’s near monopoly in training AI systems and its future growth in jeopardy.

  • [By Arie Goren]

    Recently, both suppliers of graphics processing units (GPUs) NVIDIA Corporation (NSDQ:NVDA)and Advanced Micro Devices, Inc. (NSDQ:AMD)have signed new collaborations with leading cloud companies to supply their GPUs to accelerate artificial intelligence in the enterprise. NVIDIA has announced a collaboration with tech giants Microsoft Corporation (NSDQ:MSFT)and International Business Machines (NYSE:IBM), while AMD received orders from Alphabet (NSDQ:GOOGL)to supply GPUs for Google cloud platform. Investors might wonder which one of the two companies NVIDIA or AMD is going to win the GPU race to become the primary supplier for artificial intelligence uses. While right now Nvidia dominates the GPU application in AI, in my opinion, there is enough room for both companies to grow in this marker significantly. Therefore, as I see it, to take advantage of the fast-growing deep learning and artificial intelligence market, it is better to invest in shares of both companies.

Hot Bank Stocks To Buy For 2018: RepliCel Life Sciences Inc. (REPCF)

Advisors’ Opinion:

  • [By Sara Cornell]

    RepliCel Life Sciences Inc. (OTCBB: REPCF) (TSX: RP.V) – could be changing the way we treat baldness and hair loss in the future.

    A clinical-stage regenerative medicine company, RepliCel is developing a unique biologic product that harnesses a patient’s own cells to treat pattern baldness and thinning hair, as well as products for aging and sun-damaged skin, and chronic tendon degeneration. The company recently announced the successful completion of its first-in-human clinical study of autologous cell therapy for the treatment of Androgenetic Alopecia, commonly known as pattern baldness.

Amazon Looks to Squash Apple HomePod

Amazon.com Inc. (NASDAQ: AMZN) had its biggest holiday season ever this year and its best-selling products were the Echo Dot voice-controlled speaker and the Fire TV Stick that sold for $29.99 and $39.99, respectively.

Apple Inc. (NASDAQ: AAPL) delayed the launch of its $349 HomePod voice-controlled speaker until sometime in January. Even if it had been available, chances are the HomePod would have been far behind the Echo Dot in sales due mainly to device pricing.

And Amazon is not letting up on the pressure. The e-commerce leviathan continues to sell the Echo Dot for $29.99, a discount of 40% from the list price of $49.99, even as the 2017 holiday season recedes further in the rear-view mirror.

Smart speakers like Amazon’s Echo and Echo Dot, Apple’s HomePod, and Alphabet Inc.’s (NASDAQ: GOOGL) Google Home have reached a “critical adoption threshold” according to comScore. Analysts at eMarketer project the number of U.S. smart speaker users to reach 35.6 million in 2017 (13% of internet users) and 52.8 million in 2019 (18.8% of internet users).

A few days before Christmas, eMarketer analyst Cindy Liu compared consumer interest in smart speakers to their interest in wearables like Apple Watch:

Consumers have yet to find a reason to justify the cost of a smartwatch, which can sometimes cost as much as a smartphone. Instead, for this holiday season, we expect smart speakers to be the gift of choice for many tech enthusiasts, because of their lower price points.

Given Amazon’s consistent strategy of striving for share over profit, it’s easy to see why the company is keeping the price of its Echo Dot low. Smart speakers are positioned as gateway devices for smart homes where a variety of smart appliances and other smart devices like thermostats and lights can be voice-controlled through the smart speaker.

Amazon is the unquestioned leader in voice-controlled devices and plans to build on that leadership position to keep Apple an also-ran. Google Home, which sells for $79 at Walmart with a promotional discount of $25 if a customer buys one with Google Express, can put even more pressure on Apple.

It looks like Apple didn’t catch the smart speaker wave at the right time and that the company is going to be swamped as a result.

ALSO READ: 4 Top Retailers With Nothing to Fear From Amazon

Excellent Tech Earnings Will Prolong Any Potential Bubble

The NASDAQ Composite keeps on going from strength to strength. Recently, we saw the big three — Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) — report very strong earnings, which resulted in strong spikes in their respective share prices. Over time, this should only add to the returns of the NASDAQ going forward. Why? Because it looks as if the sustained momentum from the breakout that the NASDAQ 100 managed to accomplish early last month is now going to be combined with strong fundamentals with the leaders in this sector. This is why bear market talk at present continues to be futile, in my opinion.

From a growth point of view, the leaders in the NASDAQ continue to do very well. As e-commerce and Internet activity continues to grow, talk of a pending recession seem unfounded. Also, last week we got the jobs numbers in the U.S. On the surface the numbers look very encouraging as the nation’s unemployment rate now at its lowest level since the turn of the century. At present, it just looks as if shorts are going to have to cover repeatedly in order to avoid huge losses. This will only drive U.S. equity markets higher. Here are more reasons why this market should not be shorted at present.

With respect to the “Big Three” tech companies mentioned above, it may be hard to believe but Amazon at present still looks undervalued at $1,100 a share. The company’s Prime and Web Services segments drove third-quarter earnings, which were announced on Oct. 26. Jeff Bezos has always stated that he will add so much value to his Prime program that online shoppers will eventually not be able to ignore the service. Well, we certainly seem to be going in that direction as subscription sales (mostly new customers signing up to the program) grew to $2.4 billion, which was almost a 60% increase.

Prime Day was obviously a big factor in the re-acceleration of signups, but Bezos is also clearly focused on international channels where plenty of runway for growth remains. AWS also doesn’t look as if it is ready to slow down either, as it grew its sales by 42%. The core issue here, though, is growth as Amazon grew its top line by almost 34% in the latest quarter. That number is well ahead of the 27% number the company grew its turnover by last year. It just seems as if Bezos will continue to be able to eek out higher rates of sales growth due to the firm entering more sectors. This will keep momentum investors very interested going forward.

If we look at Alphabet’s numbers, we see a similar growth story. In the company’s latest quarter turnover grew by 23.7%, which again was higher than the company’s three-year average (14.7%) or five-year average (18.9%). In fact, we saw stellar growth across a slew of financials last quarter, with operating income up by 35% and earnings per share up by 32% on a rolling year basis. The cloud and YouTube definitely seem to be the growth triggers for Alphabet at present, and again the fundamentals look favorable.

With respect to YouTube, capital that has been traditionally spent on TV will continue to migrate online. Why? Because engagement levels continue to increase with respect to online video. Bears allude to the decreasing costs of adds on these videos, but as long as eyeballs are staying for longer, then YouTube will continue to be in pole position. With respect to the cloud, we just have to look across the spectrum of cloud companies to see the sustained growth in this area. I expect to see continued investment by Google in the cloud as its cloud revenue is still only about 12% of its overall numbers.

Microsoft’s cloud business made up 28% of its top-line number in its most recent first quarter. Again, it seems as if Azure is re-accelerating as more and more users start to use Microsoft’s cloud offering. In fact, Azure grew its revenues by 90% compared to the same quarter 12 months prior, which was astounding. Gross margins in this space could easily take out 65%-70% before long, especially if we see elevated usage on the company’s cloud platforms going forward. Remember, so many sectors have yet to transition their information to the cloud, which is why I believe we are nowhere near “critical mass” or a leveling off of margins in this space anytime soon.

In fact, I remember some time ago some analysts fretting over the future of the Office suite of products. However, what we are seeing now is that Microsoft should be able to earn more from its customers due to the Office transition to the cloud as opposed to how the products were licensed before. Again, we are seeing major bullish fundamentals going forward for Microsoft. $100 a share now looks like a formality.

The difference between now and 1999 is that, presently, the forward looking fundamentals look very strong for many of the large tech companies. We are seeing e-commerce continuing to grow, a major sustained shift to the cloud, and Internet engagement levels continuing to rise. I would recommend continuing to buy on pullbacks here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Symantec: The Case Of The Disappearing Guide-Down

Symantec (SYMC) reported the results of its Q2 a few days ago. The results were a small miss on EPS with in-line revenues. Managements forecast for its fiscal Q3 was for revenues and EPS below the prior consensus and for a short fall on both the earnings and revenue line for the year as a whole. Needless to say, the shares fell noticeably for the week and lost 7% for the week as a whole and as of this writing are down 11% since the earnings release. The regnant bear on this site declared the results of the quarter to be shockingly bad. Some analysts had down-rated the stock before earnings, partially based on valuation but also based on skepticism regarding future growth.

My own evaluation of the quarter is far different. There was a quarterly earnings miss relating to some one-time items having to do with mergers, restructuring and stranded costs. The guide-down has nothing to do with ongoing operations or a failure of growth, and everything to do with a major divestiture, whose proceeds will be used to pare debt. In fact, a more careful analysis of the results for the quarter showed operational performance a bit stronger than management had previously anticipated coupled with a positive outlook for the balance of this fiscal year and over the following two years.

The guidance for the fiscal year that starts in less than five months calls for significant organic growth coupled with double-digit gains in EPS. If investors see that forecast realized, then the shares are modestly valued. I think the odds favor that kind of business evolution for Symantec and believe that the share price set-back presents investors with an opportunity. Symantec, no doubt, has been a tired old company that has been mis-run and has made poor strategic choices for many years. Its past CEOs might well populate a gallery of failed executives who got lots of pay and destroyed a great deal of shareholder value. While it is perhaps too soon to suggest that the transformation program of Greg Clark, who has been CEO since the summer of 2016, will achieve its objectives, certainly the outlook for the company is better now than has been the case. Those analysts who downgraded the shares based on growth concerns probably ought to do a little soul searching at this point.

The numbers and the look inside the numbers

I will try to make a little sense out of what appears to have been a somewhat complex earnings release. Symantecs GAAP headline numbers showed revenues up by 27% with the companys GAAP operating loss margin contracting about 50 basis points. On a non-GAAP basis, the company achieved 26% growth with a 490-bps improvement in operating margins and EPS of $.40. The $.40 number was $.02-$.03 below the prior consensus.

The companys guidance was adjusted for the sale of the companys web site security businesses, perhaps best known as managed public key infrastructure. This business, which had been contributing $400 million-plus to annual revenues was sold to a company called DigiCert for $960 million in cash + a 27% interest in sold assets. This is not really the place to comment about the issues between Symantec and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) other than to say that post this transaction, there really aren’t further issues.

The transaction leaves Symantec with about $50 million of stranded costs which are part of the guidance and will need to be remediated. The change in guidance is almost entirely a function of excluding the revenues and operating profits of the business sold to DigiCert. The impact is for five months in the current fiscal year. The company will not report the value of its 27% equity interest in the sold company in its operating earnings which is expected to be about $.02/share in earnings.

Overall, the company updated its guidance to account for the effect of this transaction and also included in its updated guidance the impact of what is currently a favorable currency variance. The company actually increased its forecast for Consumer Digital Safety revenue growth by about 100 bps, primarily a function of the extra business it has received and is receiving due to the Equifax (NYSE:EFX) security breach. The company reduced its enterprise security growth range marginally because $25 million of revenues is now coming in the form of ratable revenues rather than perpetual license. Most investors know by now that this is not a bad thing, nor is it material in a company with a current revenue run rate of $5 billion.

Symantec, is a security vendor and while it does not sell next-generation firewalls (NGFW), it is going to be impacted by the overall demand in that market. In fact, Symantec sells something called a next-generation secure web gateway which is an alternative solution to NGFW offerings. The link above is to a Symantec white paper that outlines some of the more salient differences between its solution compared to NGFWs offered by Palo Alto (PANW), FireEye (FEYE) and Fortinet (FTNT). I’m not going to try to evaluate or to handicap the competition between what Symantec sells as compared to the other companies in this space. At the end of the day, I’m not a security software consultant and there is nothing that says that Symantec, at its size, cannot be reasonably successful with its product strategy, even if some NGFW vendors are encountering a growth slowdown. The study linked here suggests that Symantec, at the least, is maintaining its market share in the enterprise security space. I do imagine that one risk perceived by analysts and others looking at this company is the chill wind blowing in the enterprise security space. That will probably cap valuation for many other security vendors, but the valuation for this company is low enough, at this point, where that should not be a significant issue for most investors.

I think it is fair to point out that the enterprise security space is showing less favorable demand trends overall, but that the Symantecs most recent results and its guidance suggest that it has been able to deal with these demand trends and to achieve moderate levels of organic growth, a meaningful change from its prior history of disappointments and market share losses.

Because of the acquisitions, year-on-year ratios are not terribly useful in trying to analyze the companys cost disciplines. Management mentioned that it had completed a $500 million cost remediation effort earlier than planned. As was pointed out in another article on this site, stock based comp doubled year-on-year and it reached 14% of revenues compared to 8% of revenues in the year earlier period. Stock based comp has now been at 13%-14% of revenues for the last three quarters and at that level it is not really an outlier compared to other companies where ratios are in the 20%-25% range. Looked at another way stock based comp represents 40% of non-GAAP operating income. It had been 29% of operating income the prior year. The company reported non-GAAP operating margins last quarter of 34% compared to 29% non-GAAP margins the prior year.

Sequentially operating expense on a GAAP basis rose from $962 million to $987 million or 2.7%. Of that $25 million increase, just over half relates to restructuring and amortization. The increase in manageable operating expenses came to $12 million or 1.2%. On a sequential basis, revenues rose by 5.5%. There is nothing in these numbers that should suggest to an unbiased observer that the companys business model improvement is not proceeding at a measured cadence.

At this point, Symantec simply reports a metric for net revenues so it is difficult to gauge the proportion of revenues now coming from recurring sources. Obviously all of the revenues in consumer security are subscription based and this company continues to have a substantial level of maintenance and support revenues. But that is not reported separately. The company has historically had a significant level of ratable revenues in enterprise security offerings. The company reported that enterprise deferred revenue balances rose by 12% year on year. This can be seen in the analysis of non-GAAP deferred revenue that is part of the CFOs prepared call remarks. I have linked to that number for the convenience of readers. As can be seen, while the total enterprise deferred revenues rose significantly for Enterprise Security on a year over year basis, there was no increase sequentially in enterprise security deferred revenues and because of the acquisition of Blue Coat in Q2 of the prior year, it is difficult to determine what a normal seasonal trend would be for that metric. Management has suggested that observers consider a bookings proxy for consideration of the strength in enterprise security but the company has to furnish a bit more data than it has, thus far, to allow most observers to calculate that kind of metric.

I simply am going to have to accept management commentary that relates to its sales performance in the last fiscal quarter, its short-term outlook and its preliminary forecast for 2019 are based on substantive metrics in terms of sales execution. I have no reason to believe that this is not the case but would obviously like to see metrics in terms of the balance sheet or cash flow that supported commentary.

Why should investors believe Symantecs forecast?

Simply put, to a greater or lesser degree they currently do not. As mentioned, the three downgrades before earnings were all dubious about future growth. On the latest conference call, more than a few questions related to managements confidence in its own forecast. Obviously, SA contributor Pablo Santos has never believed much of anything that Symantec has said about its future prospects and growth and that has been so now for more than a year. I try never to take canonical positions on these subjects but let market valuations coupled with analyst ratings tell me what is the state of the debate. That said, I have been positive on the shares for some time now and continue to hold my position.

Mr. Santos is horrified about this companys use of stock based comp. The problem with hanging an analysis on that metric is that stock based comp for Symantec is not particularly an outlier or offender in that regard. I happen to think that in many ways using stock based comp is an abomination and while it may have an appropriate role in a cash flow calculation, its use in reported earnings makes little sense. But it really makes very little matter what I think so long as investors choose to reward companies for non-GAAP earnings. Mr. Santos is apoplectic about Symantecs stock based comp., but has not been heard from, I think, when it comes to the stock based comp of Symantec analogs in enterprise security such as Palo Alto (NYSE:PANW) or FireEye (NASDAQ:FEYE) which actually have higher levels of stock based comp and more extended valuations. But none of that relates to the validity of the latest forecast provided by management, which in most ways was unchanged from prior forecasts.

The fact is that Symantec, for an enterprise software vendor, has had a levered balance sheet, the result of acquiring both Blue Coat and LifeLock in the past year. The levered balance sheet has constrained Symantecs ability to make tuck-in acquisitions and selling a non-strategic asset for the valuation it received was a decent days work. The sale of this asset, which had been pending for several months, is probably not the best reason to punish the shares of this vendor.

Adjusted for the sale that Symantec recently concluded, the company has a current enterprise value of $23.7 billion. This is a function of market capitalization of $19.7 billion (the CFO has estimated an underlying share count of 674 million although the financial statement share count is 615 million). The company has a current cash balance of negative $3.4 billion, again net of the proceeds of the asset sale. That yields an EV/S of 4.35X based on forward 12-month revenues based on underlying shares or 3.9X based on financial statement shares.

The company is now forecasting non-GAAP EPS for its fiscal 19 year (starts 4/1/18) in the range of $1.90-$1.95. That is a P/E of about 15X, and that metric suggests to me that investors are very wary of the forecast and feel the need to discount future expectations significantly.

One thing to note was the strong sequential growth in the enterprise security segment, which despite the mix shift mentioned earlier in this article, grew by about 15% sequentially – and that was not related to any additional acquisitions. Again, I have no intention of trying to go through all of the different product cycles that are likely causing that result although certainly the Blue Coat refresh is apparently a significant current demand driver. But the fact is that Q2 was a relatively strong quarter looked at carefully for both revenue growth and margins in the enterprise security space. Much of that growth is being driven by the factors cited in the white paper to which I linked earlier in the article. Management suggested that growth in the second half would be driven by the refresh of Blue Coat and cross selling from that activity. I have no reason at this point to believe that management was either using happy ears or anything outside of normal forecasting disciplines in compiling their forecasts, and their forecasts are surely better in terms of growth and margins, viewed on an adjusted basis, then are embedded in current valuation. The CFO said specifically, we have a very, very strong pipeline. We feel very good about it. I would have to say that is about as emphatic as these statements get. The CFO has a long resume in Bay Area CFO positions and before that worked at Honeywell for eight years. I simply have no basis to dispute the verisimilitude of his expectations.

Company management declared that Q2 was an inflection point with regard to the growth of the companys consumer security business. Q2 had what management described as a de minimis benefit from the impact of the Equifax breach on revenues since revenue for subscriptions is recognized ratably and the spike in subscriptions happened toward the end of the quarter. Management believes that the better than anticipated results in consumer security were a function of offering a Digital Safety bundle. Again, even were I so disposed, there is nothing that is apparent that might suggest that this branding and packaging initiative isnt doing pretty much what it was supposed to do. There are going to be observers who will suggest that what Symantec sells in its Digital Safety bundles is inadequate and does not achieve the results that are necessary to provide the security necessary for consumers. I’m not in a position to say that these commentators are wrong in some specific cases. I do believe however that the results of this past quarter and the forecast going forward speak for themselves.

Whether the forecast for mid-single digit growth in the companys consumer security space going forward proves to be realistic, it does not appear to be based on some unusual forecasting discipline or expectations of some additional specific event such as the security breach at Equifax. It would seem that consumer security, long a drag on Symantecs results, is no longer detracting from growth and may well be a contributing factor both to revenue and particularly to margin growth going forward.

Management has made certain, modest adjustments for the more rapid than expected switch on the part of some of its users to the consumption of Symantec enterprise solutions on a ratable basis. By now, this transition is common throughout the enterprise software space and no longer seems to be a cause for alarm. Management suggested to investors that the companys operational performance should best be judged on some kind of bookings proxy metric. I agree that is a better way to establish the progress this company is making and accept that the company attained its anticipated sales results last quarter. And I understand that building the release of additional metrics to support the bookings thesis can be tiresome, but the company will need to accomplish that task in order to put to rest any lingering negative penumbras that are the result of the companys lengthy history of underperformance.

Some further thoughts on valuation

I already considered this companys EV/S and its P/E earlier in the article. I have to leave it to readers and investors to debate the issue of how much of a value those metrics suggest. As mentioned, in the weeks leading up to this latest fraught earnings release, the shares had reacted negatively to analyst downgrades on the part of Morgan Stanley and Cowen. Basically, the downgrades were a function of valuation coupled with growth concerns, and the valuation concerns were those manufactured because of the divestiture about which I have written at some length. Those downgrades left just eight analysts with buys and another 19 with holds along with a single sell. While that kind of broad-based negativity is, in itself, no reason for a purchase recommendation, it does present readers with a better setup than if the efforts of this comment had garnered universal approbation.

One valuation metric to consider is cash flow from operations (CFFO). The company does forecast its forward cash flow and it reduced that expectation for the balance of this year, again a function of the divestiture, for the most part, but also relating to other puts and takes. The company CFO suggested that $100 million of the guidance reduction would be a function of the operations of the divested operations, and that the company would also be paying $225 million of one-time cash taxes, fees and expenses with the divestiture while seeing a greater than anticipated increase of deferred revenues amounting to $125 million for the year. Operationally, then, the company actually increased its expectation for ongoing cash flow – which ought to be positive for valuation.

The company is not providing an estimate at this time for fiscal 2019 cash flow other than its indication that restructuring, transition and other related project costs would total $500 million. I have no idea if there are more restructuring charges to come although obviously the company is going to deal with the $50 million of stranded costs after the divestiture. CapEx for this company has lately been negligible as it acquired lots of capital items during the course of its two mergers.

Using the current forecast as a base, and expecting stronger margins, continued growth in deferred revenues and a material reduction in the costs of restructuring suggests that fiscal 2019 free cash flow could be around $1.5 billion. That would produce a free cash flow yield of close to 7%, a level that is on the high side for a company that can grow EPS in the low double-digit range.

Until the share price pullback in the wake of the earnings announcement, Symantec shares had performed well in 2017 and even now, they are up by 20% since the start of the year. But the 11% share price pullback has brought valuation to an attractive level. The company does have a coherent enterprise security strategy that is apparently on track to propel that business to consistent organic growth. The companys consumer security business also appears to be improving. The current setup includes a fair level of investor/analyst skepticism regarding the ability of this company to achieve its goals. I like the risk/rewards of the shares at this point and continue to hold a position in the shares expecting a return to positive alpha in future quarters

Disclosure: I am/we are long SYMC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Alphabet (GOOGL) Still Has Plenty of Upside, with $48 Billion in New Sales Ahead

Alphabet (GOOGL) doesn’t seem like your typical growth stock, considering it opened at $1,030.99 this morning (Oct. 27, 2017). But Wall Street is overlooking the explosive potential our tech guru sees…

Money Morning Director of Technology & Venture Capital Research Michael A. Robinson believes Alphabet Inc. (Nasdaq: GOOGL) has $48 billion in new yearly hardware sales ahead of it thanks to the Pixel 2 smartphone launch.

Even with this new revenue source just launching in October, Alphabet announced a double-digit sales increase in its Q3 2017 earnings report yesterday (Oct. 26). The GOOGL stock price is up 5.94% today thanks to its earnings report.

Alphabet (GOOGL)

That came as no surprise to us.

“With a market cap of $686.10 billion, the stock trades at roughly $1,001 a share – and still has plenty of upside ahead,” Robinson said on Oct. 23.

Now, Robinson estimates Google can add $48 billion in new yearly sales, and that’s just the beginning of what Google is planning…

Alphabet (GOOGL) Crushes Its Q3 2017 Earnings Report

Alphabet announced its Q3 2017 results yesterday (Oct. 26) and handily beat Wall Street’s expectations.

Analysts expected earnings per share (EPS) of $8.33 on $27.2 billion in revenue. Instead, Alphabet reported $9.57 on $27.7 billion.

That’s a 24% increase in sales year over year (YoY).

Google lumps its revenue into advertising and “other revenue,” which includes its cloud business and hardware sales.

Google’s “other revenue,” which includes hardware, only totaled $3.45 billion out of $27.2 billion in Q3 2017.

That’s only 12% of total revenue.

That’s why the mainstream media are still just focusing on Google’s ad and search business and are totally overlooking what’s about to happen.

You see, a $48 billion increase in new hardware sales is an additional $12 billion per quarter, just from one piece of hardware. That would have pushed Google’s total revenue to $39.7 billion this quarter, and that would have accounted for 30% of total revenue.

Free Book: The secrets in this book helped one Money Morning reader make a $185,253 profit in just eight days. Learn how to claim your copy here…

If a 24% jump in revenue sent the stock soaring today, imagine what adding another 30% increase would do.

But as we said before, that revenue increase isn’t the only reason we’re following the Pixel’s sales.

Fortunately for Money Morning readers, Robinson knows the real story behind what Google’s planning, including what that could mean for Google stock’s share price…

This Alphabet (GOOGL) “Trojan Horse” Is Creating Double-Digit Gains

Join the conversation. Click here to jump to comments…

Ford’s #1 Market Share In Houston Should Alleviate Inventory Concerns

Ford (NYSE:F) announced August 2017 U.S. vehicle sales of nearly 210K, down 2.1% from the same month in 2016. Despite this decrease, it exceeded the 6.4% estimate from Edmunds. For the year, Ford has sold approximately 1.7 million vehicles, which is a 4.1% decline compared to 2016. These metrics are largely consistent with the overall auto industry which saw a 2% decrease in August compared to 2016, which puts the industry on pace to reach 16.3 million sales for the year compared to 2016s record year of 17.6 million. Fords decrease in August sales is largely due to a 9% decrease in car and 11% decrease in SUV sales, partially offset by a 9% increase in trucks. Overall, retail decreased slightly higher than recent months, 2.7% compared to only 1% in July, while fleet remained surprisingly steady at only a 0.2% decline.

The shift from cars to SUVs and trucks is a continued positive trend for Ford largely due to the success of the F-Series trucks (up 9.2% YTD) an d increasing popularity of SUVs – Explorer (up 5.5% YTD) and Edge (up 0.5% YTD). It is continuing to sell the right mix of vehicles in the U.S. which further pushed up average transaction price up $1,300 compared to the industry average of only $140. This shows that Ford isnt just taking advantage of cars being loaded with more safety features and connectivity options, but it is perfectly positioned to take advantage of the consumer shift away from cars to larger vehicles. The largest contributor to this was the Ford F-Series Super Duty pickup which represented 53% of the retail sales mix and contributed a $45,600 per truck price tag, which was a $3,400 increase from August 2016. Additionally, the Ford Explorer and Edge continued to fuel an impressive year-to-date through August for the Ford brand SUV segment.

With the fleet sales being largely a non-story this month, the new story is the impact of Hurricane Harvey. Some estimates indicate that up to 50,000 new vehicles shipped could have been delayed as an impact of the storm, but the automakers are expected to make it up and then some in the remainder of the year. Houston is in the top 10 largest cities in the United States and has a very high car ownership rate. Early predictions estimate that up to 500,000 vehicles could have been lost in the storm, which is more than the number of cars the Houston market averages in one year. Ford has performed particularly well in Houston and has the largest market share at 18%. This should help alleviate rising inventory levels that have been very concerning. Fords car inventory finished August at 630,801 vehicles, or 81-day supply, which is up from 616,824 vehicles, or 77 days, in July. Despite this increase, it is still down from a year ago where inventory stood at 639,967 vehicles, or 78 day supply.

Looking outside of the U.S., Ford posted a 7% decrease in July sales to increase its sales in China to over 622K vehicles. While it has been a mostly disappointing start to 2017 with year-to-date sales down 7% compared to the same period in 2016, there is some optimism after Junes report. Junes success was mainly driven by increases in the car segment – the Escort increased 30%, Mondeo 28%, and Taurus 11%. Unfortunately, the pace slowed disappointingly in the first five months of 2017. However, the one bright spot is the company saw similar success with its SUVs in the U.S. The Ford Everest sales increased 82% year over year and the Lincoln branded SUVs (MKC, MKX, and Navigator) all saw double-digit increases for the month. Additionally, Ford recently announced plans to form a joint venture with Anhui Zotye Automobile Co. to create a new brand for fully electric vehicles. This comes as the Chinese government is trying to drastically reduce pol lution in major cities and those cities are offering incentives to push consumers toward electric vehicles. Currently, China accounts for 40% of the world’s electric vehicle sales and this should give Ford access to Zotyes customers. Zotye reported a 56% increase through July this year to push its total sales to 56%. With the 50% joint venture, Ford will enter the market that General Motors (NYSE:GM) and Volkswagen (OTCPK:VLKAF) have already entered.

This continued slowing in 2017, in addition to other possible threats such as the overall health of the U.S. economy, further interest rate hikes and emergence of new competitors in the auto industry, is weighing heavily on investor sentiment. If there was an event or condition that forced the U.S. economy back into slowing growth territory or a global recession, it would definitely have a major impact on Ford. Furthermore, with further interest rate hikes announced, it is expected that the automotive market is hitting a peak domestically and may start to trend downwards. Additionally, with new companies working to produce technology-infused vehicles such as Tesla (NASDAQ:TSLA), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL), it is important that Ford stays ahead of this curve and doesn’t fall behind when it comes to the technology use in the vehicle.

Despite declining sales, Fords stock saw an increase after posting these numbers. The stock is trad ing just over $11 per share with a PE ratio of approximately 12 (both figures as of the beginning of 9/1/17); it appears to be undervalued compared to the current S&P 500 mean P/E ratio of 15.67. Given the low valuation and the company’s dividend yield around 5%, I believe the stock is attractive at current prices. While the domestic auto sales are clearly peaking, Ford is perfectly positioned to increase its average transaction price with its larger vehicle offering including the F-Series, Edge, Flex and Explorer. Additionally, the stock should see some favorability as Houston recovers from Hurricane Harvey where it has a strong market share. With this low valuation and this favorability, I expect Ford to finish out 2017 ahead of competitors.

Given this low valuation and the long-term optimism with Ford, I’m extremely encouraged by the U.S. sales results. I’m excited about the company’s future. With consumers purchasing more expensive vehicles, it will allow Ford to report stronger top-line and bottom-line growth going forward. Furthermore, I believe Ford has a strong product mix to take advantage of the growing market and will pay investors an above-5% dividend yield to own the stock.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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What To Consider Now That Roku Has Filed For IPO

Source: variety.com

On September 1st, Roku filed a prospectus with the SEC, planning to list on the NASDAQ under the ticker ROKU. Roku pioneered streaming to the television through a device that used the internet. As of June 30th, Roku has 15.1 million active accounts. In the first six months of 2017, Roku owners have streamed 6.7 billion hours through their Roku devices. This is 62% more hours streamed in comparison to the same time period in 2016. Roku devices give users access to more than 500,000 movies and television shows as well as live sports and more. They offer access to content in three different ways; subscription, ad-supported and transactional. The Roku device is intended to offer users a way to choose the content they want without having to pay for a cable television subscription, often referred to as cutting the cord. This is the number one TV streaming platform in the United States by hours streamed according to a survey commissioned for the fi rst quarter of 2017. Roku believes that content publishers and advertisers both benefit from having access to this over-the-top customer base that is entirely on one platform.

In the first 6 months of 2017, Roku generated $199.7 million in revenue, an increase of 23% year over year. In 2016, it generated a total of $398.6 million, a 25% increase from the fiscal year 2015. Roku generated revenue from selling its steaming players as well as through the sale of subscriptions and advertisement on its platform. In the first 6 months of 2017, player revenue represented 59% of total revenue while platform revenue made up 41%, a 91% increase year over year.

Roku believes that the value of the company will come from its ARPU:

ARPU, which we define as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters, was $11.22 per active user in the period ended June 30, 2017 and $9.28 per active user in 2016, up 43% from $6.48 in 2015.”

Source: SEC S-1

Source: TechCrunch

This increase in ARPU is a pretty impressive stat for investors to consider. It is clear that Roku believes it can find profitability as it shifts its business model to focus on revenue from its platform rather than device sales. Despite its improvements in ARPU, Roku still posted a loss of $24.2 million for the first half of 2017. If it continues at this pace, it will post a loss of $48.4 million, even larger than its loss of $42.8 million in 2016.

Investors who are considering investing in Roku should look at some comparable hardware companies that turned public in 2014 and 2015, respectively.

First, let’s examine Fitbit (NYSE:FIT), a hardware company that IPOed in 2015.

Chart FIT data by YCharts

Fitbit has struggled greatly since its IPO in 2015. The share price, which spiked to over $50.00 in late 2015, has settled under $6.00. The main difficulty Fitbit faces is its dependence on new device sales to maintain and grow its revenue. It seems that Roku’s management has already realized that device sales are not going to be a sustainable growth model. Even with this understanding, Roku’s primary revenue still comes from its device sales. Potential buyers should look at Fitbit’s performance following IPO before considering a purchase of Roku shares.

Next, we should examine GoPro (NASDAQ:GPRO), a company that went public in 2014.

Chart GPRO data by YCharts

After shares spiked to over $90.00, they have now settled below $9. Again, we should consider the fact that GoPro depends so heavily on device sales, which Roku is hoping to avoid. Investors have made the mistake of grossly overvaluing these device companies that only offer one product twice before, so what is stopping the same from happening with Roku?

Source: TechCrunch

Roku, GoPro and Fitbit are all similar in that they offer one kind of product. Fitbit offered the first fitness wearable, GoPro offered a new kind of camera and Roku offered one of the first OTT streaming devices. The question is, will Roku be successful in its attempt to shift from a company that generates its revenue from device sales to a company that generates the majority of revenues from its platform.

An excerpt from a TechCrunch article summarizes the challenges that Roku will face:

Roku has been able to capitalize on the cord-cutting trend, where many people, especially millennials, have opted not to pay for cable television. Instead, they are accessing content on digital platforms like Roku, Apple (NASDAQ:AAPL) TV, Googles (NASDAQ:GOOGL) Chromecast, Amazons (NASDAQ:AMZN) Fire TV and others.”

Read the quote above, one company is not like the others. While Roku may have been the first to market, it is facing off against three tech juggernauts. Unless there is a potential for Roku to be acquired, I simply do not see a way it can survive the competition it is facing. Investors can tinker with numbers and dissect financials as much as they would like, I do not believe that Roku has strong future prospects, simply because of its competition. Twice, investors have seen tech device companies IPO and crash. I believe it is likely that Roku will share the same fate as GoPro and Fitbit following their IPO.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The Empires Strike Back: Intel, Boeing Score Rare Wins Against EU Antitrust Czar

The Empires Strike Back: Intel, Boeing Score Rare Wins Against EU Antitrust Czar Related INTC Steel Is For Real There's A Late Summer Souring On Semiconductor ETFs Related BA Honeywell Could Benefit From UTX-Rockwell Collins Combination Boeing, Airbus, Analyst Question United Technologies-Rockwell Collins Deal Stocks Hold Modest Gains; Financials Rebound; Kohl's Amazon Effect (Investor’s Business Daily)

Europe's antitrust czar, the scourge of U.S. corporations, has a sculpture of a hand in her Brussels office, its middle finger extended out. On Wednesday, the bird was on the other hand.

In the latest feud between U.S.-based corporations and overseas regulators, the European Union's top court ordered a review of a $1.26 billion fine against Intel Corporation (NASDAQ: INTC).

The move was a big victory for Intel and a rare, perhaps precedent-setting setback for Margrethe Vestager, the EU commissioner for competition. Vestager’s team has been far more bullish in imposing antitrust fines and back-taxes penalties than her American counterparts.

The EU in 2009 fined Intel 1.06 billion euros ($1.26 billion), saying the computer chip maker used illegal sales tactics to keep the smaller Advanced Micro Devices, Inc. (NASDAQ: AMD) out of the European chip market.

The European Court of Justice on Wednesday sent the case back to the lower General Court so it can examine more arguments from Intel, which contended EU regulators erred in levying the fine for purported monopoly abuse.

Vestager, a former Danish finance minister, argued that Intel gave rebates to some computer manufacturers for buying all or almost all their x86 computer processing units and paid them to delay the launch of computers based on AMD chips.

See Also: A Look Into The Anti-Trust Environment Surrounding Internet Giants

Here’s a look at some similar skirmishes Vestager has had.


On Monday, the World Trade Organization reversed on appeal a ruling that Boeing (NYSE: BA) received some state aid to help build its newest aircraft, the 777X.

Last year, the WTO backed an EU complaint that Boeing got tax breaks for a production facility in Washington state.

"The WTO has rejected yet another of the baseless claims the EU has made as it attempts to divert attention from the $22 billion of subsidies European governments have provided to Airbus and that the WTO has found to be illegal," Boeing general counsel J. Michael Luttig said in a statement.

Boeing And Airbus still have a raft of claims and counter-claims pending against each other.


In June, the EU slapped Alphabet Inc (NASDAQ: GOOGL) with a $2.7 billion antitrust fine for unfairly favoring some of its own services over those of rivals.

Google had argued its ads help smaller European merchants compete directly with Amazon.com, Inc. (NASDAQ: AMZN) and eBay Inc (NASDAQ: EBAY).

Before the Intel case came down, Vestager said Tuesday that Google was tweaking its shopping ads and was moving “in the right direction” to avoid further fines.


Last May, Amazon and the EU settled an unfair competition case with Amazon over the way it markets its e-books.

Vestager contended that Amazon's agreements with publishers shut out competitors trying to get into the e-book business.

“Amazon used certain clauses in its agreements with publishers, which may have made it more difficult for other e-book platforms to innovate and compete effectively with Amazon,” she said in a press release.


In another move by Vestager, the EU Commission socked Apple Inc. (NASDAQ: AAPL) with a $15.5 billion bill for back taxes allegedly owed to Ireland, even though Ireland said it didn’t want the money. Both Apple and Ireland are appealing.


Like Apple, Starbucks Corporation (NASDAQ: SBUX) is currently appealing an EU Commission decision holding it liable for about $35.8 million in back taxes in the Netherlands.

Vestager, in an exhaustive profile in Foreign Policy, said she takes charges of anti-Americanism seriously.

“The casework has to be objective and fact-based because, of course, our decisions may have to hold up in court,” she said.