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Credit Analysis

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Energy

Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Every Industry Is Now A Technology Industry

Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

Credit Analysis
Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Mar. 20 2018 — The race to become the first trillion dollar company is heating up, with everyone paying close attention to the tech mega-caps — Alibaba Group Holdings Ltd. (NYSE: BABA) and Amazon.com Inc. (NASDAQ: AMZN).

Despite a lack of consensus over who will take the crown, one thing is evident: no two companies in the race are as neck and neck and as similar in business strategy and operations as Amazon and Alibaba. Both champion the e-commerce landscape in their specific countries – Amazon in the U.S. and Alibaba in China - and both have made their forays into new industries such as food and healthcare.

Wall Street is following these companies closely, with Alibaba slightly in the lead in terms of analyst recommendations. As of April 2, 2018, the Chinese e-commerce behemoth has received 37 buy ratings and just two hold, according to S&P Global Market Intelligence data. The average analyst price target of $226.44 suggests upside potential of roughly 23%. Amazon, in contrast, has received 31 buy ratings and two hold. The average analyst price target of $1,709.05 suggests upside potential of roughly 18%.

To keep a tally of the race, we used the RatingsDirect® Monitor, a data visualization portfolio monitoring tool that provides risk/return insights and helps track and analyze market movements for publicly-traded companies that are rated by S&P Global Ratings.

Figure 1: Tech Mega-Caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

Tech mega-caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

For illustrative purposes only.

At a market cap of $471.6 billion, Alibaba is not too far off from catching up to Amazon’s $700.7 billion cap. Alibaba stock’s price has observed a three-month price volatility of 40.1%, the largest among the tech titans and far surpassing Amazon’s 30.8%.

Although the higher volatility and lower S&P Global Ratings’ long-term credit rating present more risks for investors, Alibaba’s higher return on assets and lower P/E and leverage ratio suggest more opportunities for the Chinese e-commerce behemoth to grow and reach the $1 trillion valuation first.

Comparing disruptive levels of innovation

To compare the disruptive level of innovation in the various sectors that Amazon and Alibaba have entered, we selected comparable events between the two conglomerates and examined industry-level probability of default (PD) changes of the PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

The war for groceries

Both Amazon and Alibaba have been stepping up their battle in the grocery business. Just last year, Amazon’s announcement to purchase Whole Foods Market Inc. for $13.7 billion shocked investors, with shares of some of U.S. food’s largest players – Kroger Co. Supervalu Inc., Costco Wholesale Corp., Target Corp., and Wal-Mart Stores Inc. – dipping on the news. The market perceived credit risk of the U.S. food retail industry also escalated. One week following the announcement, the U.S. food retail PD jumped from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or about a 30% increase in the industry’s probability of default.

Figure 2: U.S. Food Retail Median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

U.S. food retail median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

Alibaba also aggressively expanded its food footprint in 2017 with its rollout of new supermarkets under the Hema Xiansheng brand and its $2.9 billion investment in China’s largest hypermarket operator Sun Art Retail Group. Just this year, reports that Alibaba held early development talks with Kroger Co. left the Chinese food industry shaking. One week following reports of the discussions by Reuters and New York Post, China’s food retail PD increased 109.10% from 3.05% on January 23, 2018 to 6.39% on January 31, 2018. [i] [ii]

Figure 3: China Food Retail Median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

China food retail median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

The battle for pharma

Pharmaceuticals have been another potential battleground for the e-commerce giants.

According to an October 5, 2017 note published by Leerink Partners managing director Dr. Ana Gupte, Amazon is “hiring relevant talent and are in active discussions with mid-market PBMs [pharmacy benefit managers] and possibly even larger players such as Prime Therapeutics.” Following publication of the note, the U.S. drug retail PD escalated 22.55% from 16.16% on October 4, 2017 to 19.81% on October 12, 2017.

Figure 4: U.S. Drug Retail Median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

U.S. drug retail median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

Similarly, China’s drug retail PD jumped 90.67% from 1.55% on February 1, 2018 to 2.96% on February 9, 2018, following Alibaba’s February 2, 2018 announcement to partner with European pharma giant AstraZeneca PLC.

Figure 5: China Drug Retail Median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

China drug retail median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

The risks of innovation

In summary, our PD Market Signal model shows that Alibaba disrupts the short-term market perceived credit quality of firms more than Amazon does. The Chinese e-commerce behemoth is viewed by many investors as a proxy for China's consumer economy and growing middle class, whereas Amazon is not, and PD movements are reflective of this. As illustrated by our RatingsDirect® Monitor, Alibaba has a much lower leverage compared to Amazon, with a last-twelve-months Debt/EBITDA ratio of 1.4, compared to Amazon’s 2.9. Alibaba also has higher growth potential from the perspective of ROA and P/E. Alibaba’s ROA stands at 7.4%, compared to Amazon’s 2.4%. Further, Alibaba’s lower P/E ratio of 46.3, compared to Amazon’s 235.3, suggests that the Chinese firm may be undervalued.

Figure 6: Tech Mega-Caps: ROA (%) vs. Debt/EBITDA (x)

Tech mega-caps: ROA (%) vs. Debt/EBITDA (x)

For illustrative purposes only.

Figure 7: Tech Mega-Caps: ROA (%) vs. P/E Ratio (x)

Tech mega-caps: ROA (%) vs. P/E Ratio (x)

For illustrative purposes only.

Whether Alibaba will claim the $1 trillion title before Amazon, however, remains to be seen. A fast growing company, Alibaba faces significant challenges from China’s ever-changing business environment, including potential regulatory, litigation, and international expansion risks, as outlined in roughly 45 pages of the firm’s most recent annual report.

Despite the inherent risks, what sets Alibaba apart is its domination of China’s online marketplace, which is the single-largest in the world. Founder Jack Ma has also been faster than Bezos to expand his business lines. The use of Alipay, one of the world’s largest mobile payment platforms, and the firm’s roughly $350 million investment in Chinese electric-vehicle maker Foxconn Technology Group are just a few examples of the firm’s growing economies of scale.

[i] Alibaba, U.S. grocer Kroger had early business development talks: source. (n.d.). Retrieved March 01, 2018, from https://www.reuters.com/article/us-kroger-alibaba/alibaba-u-s-grocer-kroger-had-early-business-development-talks-source-idUSKBN1FE0EF

[ii] To battle Amazon, Kroger eyes Alibaba alliance. (n.d.). Retrieved March 01, 2018, from https://nypost.com/2018/01/24/krogers-answer-to-amazon-go-alibaba/

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.


Technology, Media & Telecom
Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Oct. 08 2018 — Both buyers and sellers of traditional linear TV advertising, not including connected TV or over-the-top video, are moving toward the adoption of programmatic trading. In 2017, Kagan estimates that $690 million or 0.9% of total linear TV spend was traded programmatically. Within the next five years, that figure is expected to climb to $9.76 billion or nearly 12% of total linear TV advertising revenue. MVPDs are forecast to trade the greatest percentage of their ad inventory programmatically in 2022 with 30% of ad revenue from programmatic trading.

Kagan defines programmatic trading as being automated and data-enhanced, not just one or the other. Trading may be through a private or open marketplace and does not have to be through an auction, which is more common in digital video advertising.

There are several issues holding participants back from programmatic trading. Unlike digital programmatic marketplaces, where there is a seemingly unending supply of ad inventory, linear TV has a finite supply. Demand for TV inventory exceeds the supply, so there is still an attitude of "If it isn't broken, don't fix it." TV ads are also bought well in advance, not immediately.

While many agencies have experimented with the programmatic trading of linear TV, not all are on board. Many of the advertisers and agencies are interacting directly with the supplier platform rather than going through a demand-side platform, or DSP, today. In their experiments, the agency needs to use separate platforms to aggregate inventory and tie it together, which is a lot of work.

The lack of inventory is one factor holding back programmatic trading. The only way it takes off is to make linear TV inventory available in some type of buyer platform that can combine the various supply platforms. It is even more complicated when the buyer wants to bring in connected TV (OTT).

Agencies do like the automation capabilities of programmatic, particularly where the process takes a lot of time. An algorithm may do better in areas such as weighting estimation, the first pass at scheduling and the negotiation process as well as postings and billings. The process of buying inventory is not difficult, but computing where a buyer will be able to find its preferred audience is. Therefore, interest in automating the planning and analysis to find an optimal audience is high.

We forecast a gradual uptake for programmatic trading with continued testing in 2018. Broadcast stations and networks, cable programmers, and MVPDs need to add more inventory to programmatic platforms before agencies begin using it in earnest. It will take time for all parties to feel comfortable transacting in a new way.

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Technology
Every Industry Is Now A Technology Industry

Highlights

And every company is now a technology company.

Sep. 28 2018 — As machine learning (ML), artificial intelligence (AI), and robotics become commonplace and enter the operations of mainstream organizations, leadership teams are finding that failure to harness and leverage AI puts them behind the competition. Repeatable tasks are carried out by bots in a fraction of the time and employees are more focused on adding value, which means companies on the forefront of technology can be more reliable, more user-friendly, and faster to market.

In this highly disruptive environment, one traditional truth of business has withstood, or has perhaps even guided, these technological advances: above all, the customer experience is king. More than ever before, businesses have effective technologies at their fingertips to quickly and effectively address customer pain points, while at the same time dramatically improving their internal operations.

At S&P Global Market Intelligence, we strive to get beyond the buzzwords and truly deliver essential insight. And second to this, we strive to adopt real operational efficiencies into our delivery that are paralleled by the workflow efficiencies we promise to our customers. To that end, we are committed to remaining on the cutting edge of emerging technologies, first through optimization, then automation.

Download a recent analysis of how we’re applying new technology like natural language processing to structure data, robotic process automation to deliver insights faster, and predictive analytics to stay ahead of the market.

You can also view this analysis in Spanish, Portuguese, Mandarin, and Japanese.

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Natural Language Processing – Part II: Stock Selection

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Natural Language Processing, Part I: Primer

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Technology, Media & Telecom
Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Sep. 20 2018 — Spending on home entertainment is rising toward levels not seen since 2004, when consumers spent $24.37 billion building massive home-video libraries of DVDs and VHS cassettes. Since then, the optical-disc market saw more than a decade of significant declines as consumers shifted to digital entertainment. By 2012, total spending on home entertainment was down to $20.13 billion, with $4.13 billion coming from online video while DVDs and Blu-ray discs accounted for $12.88 billion and multichannel PPV/VOD contributed the remaining $3.13 billion.

Fast forward to 2017 and the mix of consumer spending has changed significantly. Consumers spent a total of $22.62 billion on home entertainment from multichannel, online and disc retail/rental sources. Online spending accounted for $13.00 billion of that total while spending on discs dropped to $6.84 billion and multichannel PPV/VOD shrank to $2.79 billion.

While the data might seem like good news for traditional providers of home entertainment, a key component of the growth in digital spending is the rise of subscription video on demand. The majority of online spending is going to over-the-top services like Netflix, Hulu and Amazon Prime, which increasingly have focused on creating original programming (mainly episodic TV) rather than licensing content from Hollywood studios.

Removing subscription streaming from the consumer spending pool paints a less favorable picture for traditional content providers. In 2012, consumers spent just $1.43 billion on non-subscription online video purchase/rental, and a total of $17.44 billion excluding the SVOD component. By 2017, while consumer spending on online video overall had risen to $13.00 billion, some $10.47 of that came from streaming subscriptions versus $2.53 billion from online video purchase/rental, and total home-entertainment spending was just $12.16 billion excluding SVOD.

Spending on sell-through home video peaked in 2006 when consumers shelled out $16.53 billion for DVDs and VHS cassettes. Since then spending has declined by hundreds of millions (sometimes billions) each year. In 2017, consumers spent $6.50 billion on DVD and Blu-ray sell-through and electronic sell-through. This seems to suggest that people are becoming less and less interested in adding to their home-video libraries and are turning to the more affordable streaming options. The story is similar for the home-video rental segment, which saw consumer spending peak in 2001 at nearly $8.45 billion before dropping to $2.87 billion by the end of 2017.

This has to be a somewhat unsettling trend for the major film studios, and is likely a key factor in shifting their strategy to focus on major franchise films and low-cost genre fare. The former tend to have broad worldwide appeal and can still move enough video units to help offset their high production and distribution costs. The low-cost genre fare, on the other hand, may be more risky and not sell as well internationally, but has a fair chance to break even. If the latter films lose money, the successful franchise films typically cover the losses.

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US Online Video Outlook To Eclipse $15B In 2018

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DVD, Blu-ray Spending Down $1B-plus For 11th Year In A Row

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