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Facebook’s Big Surprise, Where Do Shares Go? Plus AMD and Qualcomm
Michael Kramer and Clients of Mott Capital own shares of GOOGL, NXPI, V
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If I had predicted that Facebook was going to plunge by more than 20 percent after earnings, everyone would have called me nuts. However, that is what occurred. Nobody saw the revenue miss coming. Facebook had beaten on the top line for nine quarters in a row.
That is about $125 billion in market cap gone. GE’s market cap is only $113 billion. To give your perspective on the size of the loss.
We all knew rising cost where an issue for this year, you could see it in the earnings estimates, with revenue quickly outpacing earnings growth by a vast margin. However, what nobody saw coming was the slowdown in revenue, with revenue growth seen decelerating by high single digits in the third and fourth quarter.
Analysts had been looking for revenue to grow by nearly 38 percent in the third quarter. To me, that means sales growth slows to 29 percent. That is a significant slowdown, but still a tremendous growth rate.
It has been clear for some time that there was no growth left in daily active users in North America. After all, it has been around 183 to 185 million users now for a year. However, the biggest concern Facebook shareholders should have is what happens to revenue per user (ARPU) in North America (NA). That is because ARPU in NA is dramatically higher than in other parts of the world. Average revenue per user in the US and Canada is $25.91, and the second highest is in Europe at only $8.76, Asia/Pacific only $2.62, and Rest of World just $1.91.
In the quarter, Facebook NA revenue was $6.2 billion of the $13.2 billion. So, if North America growth is tapped out, then the only way the business can continue to grow the top line in a meaningful way is to increase NA ARPU or to improve the base around Europe, Asia, and ROW and get ARPU up. Otherwise, there is a big problem for Facebook.
I had worried about this stuff a year or so ago, but that was when the stock was like $140, and for more than a year it was a bad call on my part. Was I some genius, no because apparently, the stock is still higher than it was then. However, I think for the first-time investors may be realizing that Facebook is a maturing business and at some point, the growth will slow materially.
However, shares weren’t overly expensive before today’s results trading at 21.5 times 2019 estimates. The problem is how far down do the forecasts come.
I do not know how far Facebook will trade down tomorrow, or if we see a Netflix like recovery. However, there appears to be some support around $173 and then $166 in the technical chart. There’s a difference between Netflix and Facebook. Netflix is earlier in its growth phase than Facebook, and Netflix is a subscriber model, and Facebook is an ad-based model. Revenue is generated in different ways, and Netflix isn’t dependent on ad budgets.
By the way, Facebook has a weighting in the SPY ETF of 2.11 percent, and in the QQQ ETF of 6 percent. So, Facebook will weigh on the overall market.
AMD
In another bizarre set of results, AMD beat on the top and the bottom. Again, if I had told you the stock would miss revenue guidance, and shares would rally after hours you’d think I was nuts. However, that was what was happening. I haven’t had the time to review AMD, spending the time instead on Facebook.  If memory serves me correct, AMD has seen significant gaps up, only to give back those gains following earnings multiple times in the past, so don’t get over excited or be too eager on this one.
Qualcomm
Qualcomm reported results, and they were solid, beating both on the top and bottom lines. With the NXP deal likely not happening, Qualcomm’s stock was trading higher.
I had been 2 for 2, going into today’s earnings, now 4 for 4, with four correct calls and four wrong calls. Right on Alphabet, Biogen, Qualcomm, Visa, wrong on Facebook, AMD, NXP, and Boeing. (You can read Here and Here)
Back To Facebook
All of this puts a lot of pressure on Amazon tomorrow night. If Amazon has the same fate as Facebook, it could get ugly.
Look, many of us were caught off guard by Facebook’s big announcement, otherwise, it would not be down by 20 percent. But let’s face facts. Facebook isn’t going out of business. It is still growing earnings and revenue at an astronomical rate. Although the stock was up a bunch, its valuation was not insane. Geez, it even trades at a historical PE ratio of 33 over the trailing twelve months, which isn’t crazy given its historical rate of growth. The market will have to go through a process of sorting things out, and that might take a few days. But it will happen, and life goes on.
Hope it helps.
-Mike
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#facebook #FB #amd #qualcomm
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