Apple employees cheer as the doors are opened for customers at the Fifth Avenue Apple Store, September 22, 2017 in New York City.
It’s been a wild year for the tech and media worlds in 2017. We have seen gigantic mergers like AT&T with Time Warner, as well as Disney and 21st Century Fox. But 2018 could be even more exciting.
Below are my fearless tech and media predictions for how 2018 will play out:
- AT&T and Time Warner happens. After much drama, the two sides will proceed with a merger after a settlement between the Department of Justice and AT&T just prior to their trial starting in March. Jeff Bewkes gets to retire to the Turks & Caicos. Randall Stephenson gets to oversee the mother of all integrations. Unfortunately for AT&T, the deal will not jump-start growth for the wireless provider.
- Fox and Disney sails through government approval. Compared to AT&T and Time Warner, Disney and its merger with the Fox assets will be a breeze as it goes through the domestic regulatory review. The deal will get approval before the end of 2018. Disney shareholders will also inherit the Sky assets in full as Fox’s bid for the rest of that company will get the blessing of the UK regulator in the summer. Expect some big announcements about how the Fox assets will be worked into the Disney Over-The-Top (OTT) channels once the deal is approved.
- M&A bonanza as IPO market dims. The floodgates did not open for tech IPOs in 2017. This was mainly due to the tepid results of the ones who did go out, including Snap. Instead of IPOs coming back strong in 2018, expect the opposite. Public market investors will continue to be choosy with new issues compared to private venture capitalists. That means you should expect more M&A action in 2018. Larger tech companies are looking for a boost to earnings, as well as new innovation. The most popular targets will be ones which can be run profitably once their duplicate costs with the buyer are reduced, and as their products get pushed through a larger company’s existing sales channel. You should also watch for more mega-mergers and for some of the smaller media companies to look to be digested by their larger siblings. You will continue to hear CEOs of the buying companies preach the gospel of increased scale.
- First institutions dip toes in water for bitcoin, and the price explodes. Bitcoin and other cryptocurrencies have been the story of 2017, and I guarantee you that no one at this time last year was predicting this. Even though the price rise this year has been astronomical and made critics warn against the past excesses of the dot com bubble, there’s an important point to make: Virtually no institutions have yet participated in buying cryptocurrencies. The reason is that they have no defensible way to custody their crypto holdings. Imagine if you’re a large pension fund and you allocate half a percent of your assets to crypto as an asset class and then find out a month later that it’s all disappeared in some Mt. Gox-like event. That cannot be allowed to happen, and so institutions have been waiting on the sidelines. There are a number of private companies (as well as larger public ones) working on an answer to this problem. When they can provide some reasonable assurances of their acting as a custodian, expect many institutions to rush into the market. And when that occurs, expect a corresponding rise in prices.
- Apple demand stronger than ever. Over the last few days, a couple of small research firms have estimated that Apple will cut its estimates for current quarter shipments of iPhone Xs. This has led to a decline of Apple’s share price of a couple of percent. We have seen this movie before. Typically, after the next earnings report, all is forgotten. Apple has managed to reach the 200 million a year mark in iPhone sales. And there’s still upside opportunity for Apple from attracting Android users. They are powering towards the 300 million units a year mark in the coming years.
- Apple repatriating offshore cash is a boost to the stock. One of the first companies to potentially announce a large corporate response to the new tax bill in 2018 is Apple. It has $270 billion in cash — over 90% of it offshore. Under the new tax plan, it could bring back this offshore cash and only be taxed at a 15.5% rate. If they do a big repatriation, expect them to make stock buybacks a big part of their use of the repatriated cash. Spending something like $70 billion in cash on buybacks would reduce Apple’s shares outstanding by about half a billion shares at current prices. That would lead to an increase in Apple’s stock price by about $20 per share, all things being equal.
- YouTube will be a major driver of Alphabet’s stock in 2018. Out of all the FANG stocks, Alphabet is sometimes the least talked about, even though it still is up 34% this year. Watch for YouTube to become a major driver of the stock in 2018. Its app is always included in new Smart TVs being sold. It remains an incredibly popular way for especially younger viewers to get their entertainment and is not tied at all to the legacy cable bundle. Its ad revenues are just incremental for Google. Whether or not its subscription service succeeds or not, YouTube is going to be seen as a major force in media.
- Rich get richer in Big Tech. Related, the FANG stocks should continue to do well in 2018. There’s a sense that since all these big tech growth stocks did well in 2017, that they should underperform in 2018. I disagree. The scale of all these companies is allowing for dramatic increases in their capital spending. Apple spent $12 billion in CapEx last year vs $9 billion in 2014. Facebook spent $6 billion last year vs. $2 billion in 2014. Amazon spent $9 billion last year vs. $5 billion in 2014. You can’t do that without major advantages over the universe of smaller tech firms trying to nip at your heels. This should allow all the big FANG stocks to accelerate their lead which should be reflected in their growth in share price as well in 2018.
- The next head of ESPN has the inside track to replacing Bob Iger in 2021. If you listen to the doom-and-gloomers, ESPN is a broken company because its domestic subscribers via the cable bundle are down to 88 million from 100 million a few years ago. But what if the person who gets named to be the President of ESPN in a few months, replacing John Skipper, helps to totally change that narrative. If he or she can and help to show that ESPN will continue to be the biggest driver of Disney’s earnings for the foreseeable future, that person will have the inside track on being named Bob Iger’s successor for 2021. So pay close attention to who that person is.
[Affiliates controlled by Eric Jackson have long positions in DIS and AAPL]
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