It was a good quarter, but the guidance for revenue growth in Q4 was lowered by 5%. More importantly the company described 2017 as an investment year. That implies the growth rate will slow. One of the main drivers of Facebook's earnings growth is increased ad-load on timelines. This means the amount of ads on the news feed has been increasing. This will end in 2017 as the amount of ads will reach its capacity. This isn't a new thing as Facebook told investors this last quarter, but the market's negative tone is using this along with the lowered guidance to price the stock lower.
The $7 billion buyback is very close to what the stock based compensation is. That's not to say the buyback is bad. It's just something to keep in mind. Another thought I have is how much Alphabet has improved in terms of transparency by breaking down each segment under the Alphabet banner. This move was simultaneously made with the equally important goal of avoiding spending too much money on projects unrelated to Alphabet's core. Alphabet has been cutting back on Google Fiber which makes sense. Even while paying more attention to costs, Alphabet was able to unveil the highly touted Google Pixel phone. With Apple and Samsung floundering with their new product releases, the phone should do well.
The growth in Twitter's daily active user base is anemic. With the Twitter failing to sell itself, it should focus more on its turnaround. However, I am afraid the company will try to change itself to get acquired instead of trying to make long term fixes. Did the company suddenly now decide that Vine should be ended because it didn't get bought out or was this a decision to cut costs and actually make a consistent GAAP profit? I need to see a big decrease in stock based compensation to become more constructive on this stock. That being said, the stock still has a floor somewhere in the double digits because of the possibility of it being acquired.
I am focusing the most on YouTube Connect. It is YouTube's initiative into live video which will take on Periscope and Facebook Live. Because YouTube creators make a living on the website, YouTube has a leg up on the quality of content it will be able to produce. YouTube already has the ability to host livestreams, but when YouTube Connect comes out, it will be a game changer. YouTube Games was behind Twitch in live gaming and caught up, so I expect it to leapfrog over Facebook and Twitter when it is released in a few weeks. YouTube Connect will be sleek and easy to use. It will generate similar buzz to Pokemon GO.
It looks like Prime is beating out Netflix. Netflix added only 160,000 subscribers in the U.S. last quarter even after forecasting adding 500,000 subscribers. One of the reasons Netflix gave for the estimate miss was the grandfathering in of a price increase of $1 to $2 for existing subscribers which caused an increase in churn. Pricing is where the Prime packaged deal excels as it costs $99 for the year and comes with both free shipping and video. Amazon says it plans to nearly double its investment in online video by the end of the year, so it looks like it will continue to take share from Netflix in the streaming business.
The one weak link in this great quarter was that management said the ad load would stop increasing in mid-2017. This means the rate of growth for that lever will decelerate. The other lever is pricing as Facebook can raise what it charges per ad if it can improve the click through rates of its various products. Facebook trades on 2018 earnings, so this statement is important as the stock is already fully valued. I expect great results for Facebook the company, but not for the stock as the valuation is too high as its 2017 PE is about 33.
The point that a user can go live from the Twitter app is misleading because when users tap on this function it sends them to the Periscope app. This is a shortcut, not an integrated function. If Twitter decides to integrate Periscope fully like Facebook does, then the total users on Periscope will decline, but the number of users interacting with the function will increase. Twitter may be working on this, but it was already a mistake to not launch with the feature integrated even if it delayed the launch.
I'm skeptical of a company which has struggled to be profitable over many years. All of a sudden one quarter which has an earnings beat and the company gets a pass? The stock is still being valued at 120 times next year's earnings. I would be particularly weary of buying any high beta stocks with the volatility I expect to see this summer. Clearly Amazon Web Services has been improving, but it is not enough for me to even consider buying the stock. Leave this to the momentum traders.
Facebook may have a 10 year road map, but how does that jive in a weakening economy? While it's easy to praise the company for the earnings beat, that isn't going to make you money. The question I have is "how will Facebook perform in a recessionary environment?" The business may hold up reasonably well, but based on the momentum and high valuation, I don't think the stock will hold up as well. That's why I sold it at $107. This was clearly a mistake as the stock has rallied since then. Of course, it is also impossible to time the market perfectly. Facebook is in the advertising business. As corporate earnings decline, their marketing budgets will follow suite. That's my concern.
Twitter's Niche app is excellent for enabling content creators to monetize their brand in unique ways. Now it's time to bring that expertise to Periscope. Periscope needs to allow creators to monetize their content in order to stay ahead of Facebook Live and YouTube Connect. Periscope started this live video trend, so I don't see why it shouldn't be the first to market with this feature. Monetization is not necessarily about making money for Twitter in the short-run. It is about incentivizing content creators to chose its platform to stream live. (I'm aware YouNow has monetization, but its more of a niche product for a younger audience).
When you buy Netflix stock, you are under the assumption that the company could make a sustainable profit in America if it wasn't expanding internationally. You are also assuming the international roll-out will be successful. I am not willing to make those assumptions as we see increases in churn whenever a price increase is implemented as the firm is guiding for in Q2 with its very low estimates for net adds. Netflix bulls always speak of the great value it offers consumers, so why would anyone quit after a $1 price hike? Maybe the value isn't as great as it is purported to be. I went into the earnings report short Netflix and I remain short the stock now.
First View is a bad idea. Social networks lose popularity when ads increase. Twitter needs to circle the wagons and stop increasing ads until it regains growth in users. A giant video ad blasting in the faces of users is the exact wrong thing to do and shows that management is a slave to Wall Street. While caring about Wall Street makes sense, trying to meet its hyper short-term focus is a recipe for disaster.
I highlighted one word in this 8-K. The word advertising says it all. Google makes money from ad spend. While spending on online advertisement is in secular growth mode, there will be a decline in total ad spending in 2016 and 2017 as the economy shrinks. Google is my favorite part of the FANG because of YouTube's growth. However, not even Google can withstand the wrath of this bear market. I still believe YouTube Red has long term potential. However, in the short run the expectations for this initiative must be railed in because of the impending recession.
Facebook has had a successful transition to mobile. After the IPO investors questioned if Facebook could monetize mobile. This question was answered. It can monetize mobile. I can see Facebook being the world's largest company in 5 years. However, I sold my shares because of medium term risks. The two risk factors are the macro environment and the over-valuation. If we have a recession in Q3, ad spending will go down. When the rate of growth slows for Facebook, it will experience the dreaded multiple contraction. The stock trades at a price to sales ratio of 18. This will come down this year. After it does come down, this stock will be a buy. You can ignore the macro environment at your own peril. The junk bond yields don't lie!!!
Apple guided lower than estimates, missed iPhone estimates, missed iPad estimates, and missed Mac estimates. It's a very bad sign to miss numbers which were already lowered because of negative supplier data. You have to look at the rate of change of growth and the new products to determine the future stock price. The iPad Pro was a flop as it did not help out iPad sales. The rate of change is slowing as the firm cannot grow in a saturated smartphone market. I am short $SWKS because I am negative on Apple. The chart on Apple is a disaster as it has a head an shoulders pattern. If it falls below $97, it has no support and will be in free fall mode.