Facebook (FB) Reports Impressive Results But It’s Only Getting Started

avatar By: IS
Date posted: 07.24.2014 (3:00 am) | Write a Comment

$FBI’ve obviously been writing about Facebook for quite some time on this blog and while I’ve been very fortunate in how things have played out, I do still think it’s a fascinating story no matter how you look at it. At the time of the IPO, I strongly believed Facebook was a great value at those levels but I was obviously in the minority and since I tend to stay away from newly turned public companies for the first few months (I hate the initial volatility), I did end up buying a few months later. As you can imagine, if I thought $38/share was a value, getting in under $20 was a steal. There was risk involved (there always is), but in terms of upside vs downside risk, it was a no-brainer.

Much of the criticism of Facebook’s valuation was based on:

-Doubts about Facebook’s ability to remain the dominant social network (FB = MySpace)
-The limited available growth in terms of users (if FB growth = user growth, then how much further can you get past 1B? and more importantly, how valuable in the short term is that 2nd billion users?)
-Revenues: If mobile was going to mean less of those big flashy banner ads, then was Facebook doomed when internet moved to mobile?

I personally discounted the last 2 arguments and believed the first one was possible, especially if Facebook made some big mistakes, but unlikely. Over time, more concerns have been added:

-Younger generation moving away from Facebook
-Users splitting their attention between an increasingly large number of social services
-etc

That being said, by all accounts Facebook has been delivering in an incredible way in the past few quarters. Just look at growth in users, revenues and earnings:

DAU

REVS

EPS

 

credit: FB earnings slides

When I look at Facebook’s stock near the $75 level (point it reached yesterday in after hours trading), I do continue to see tremendous upside. Why? In my opinion, there are 5 clear steps for Facebook and while all of these will be on-going, I’d say Facebook is barely into step #2:

-Step #1: Building and Never Stop Improving and Building: Clearly, Facebook already has the top social network around but has continued to build on it both through its own efforts (improving core Facebook, messenger app, etc) but also through acquisitions such as Instagram, WhatsApp, etc.

-Step #2: Build an advertising based business: Facebook started off with those flashy banners but has moved beyond those to news within the newsfeed, app installs, etc. They mentioned on yesterday’s call that in many countries the ads are being perceived as nearly the same quality as the other content. Clearly, there is still a long way ahead but Facebook is making great progress as we can see in their impressive growth. I believe that will continue but perhaps even more important is Facebook’s ability to sell ads outside its walls thanks to its growing relationship with other app developers, its integration of Liverail, etc. Facebook is only getting started here.

-Step #3: Other revenue efforts: As of right now, efforts such as payments, ecommerce and subscriptions are minimal as they should be. But I strongly believe that these will represent a huge stepping stone in the coming decade. There are much bigger gains in advertising right now but as the internet continues to mature, as smartphones spread and as Facebook’s ecosystem and the outside world adapts, revenue opportunities will emerge and I think this will be a focus in a few years.

-Step #4: Full integration: I’m clearly not a believer in Facebook integrating Instagram, WhatsApp or other “products” into Facebook but if Facebook does make progress on elements such as payments, advertising, etc, it will clearly be able to slowly integrate some of those features into those products. There is no reason to rush this. Those products are not as mature and the focus is on step #1 but I do think they will reach that point in the future.

-Step #5: Future Platforms: Mark Zuckerberg discussed this a bit in yesterday’s call. Clearly, while Facebook has what I consider to be an ecosystem, it does not control things the same way that Apple and Google do because those 2 players own the dominant mobile O/S. One day, as we have started moving away from desktop computers, smartphones will start losing market share to newer mediums and Facebook believes the Oculus Rift purchase will help Facebook be in a better position in the next “platform” than it is on desktop or mobile platforms.

So yes, Facebook is just getting started and the upside remains very significant in a market where most see Facebook’s end game as advertising.

FB Chart

FB data by YCharts

Disclaimer: Long Facebook (FB)

 

New Trade: Long Google ($GOOG) & Short Blue Nile ($NILE)

avatar By: IS
Date posted: 07.21.2014 (3:00 am) | Write a Comment

Ahh the earnings have started coming in. These days, I’m spending (too much) time reading at night trying to draw conclusions from both the earnings numbers but also the earnings calls. I’ll try to write more about it this week, I obviously can’t wait to see what Facebook (FB) and Apple (AAPL), my two biggest long term positions come out with. I also am closing out 1 trade as I mentioned this morning. After another good week, the long & short portfolio has returned 29,51% so far this year. The past 3 years have been good but this is obviously the top one since writing this blog. Hopefully things do keep up.

I discuss earnings, trading and give my thoughts on the tech stocks in my free email newsletter, feel free to join here:

You can also see my live trades here:

http://www.intelligentspeculator.net/livetrades

Today I didn’t have as many options as I usually do despite only having a few live trades. Earnings season gave me less confidence in many of these stocks so after doing some filtering, I ended up with 7 names. I was tempted to do a trade with Twitter (TWTR) and LinkedIn (LNKD) but will wait for both to report earnings before drawing more conclusions. So I’m going with 2 stocks that I’ve traded frequently:

Ticker
Name
Price
PE Ratio
PE Next Year
Return YTD
Sales Growth
Analyst rating
Book Value
Beta
Revenue/Share
Sales 5Y Avg Growth
EPS 5Y Avg Growth
Sales 5Y Avg Growth
EPS 5Y Avg Growth
GOOGGoogle Inc595.08N/A18.1N/A19.234.46N/AN/AN/A23.8417.098.1913
NILEBlue Nile Inc27.431.0821.23-43.2412.493.672.180.9535.8910.85109.90.65N/A

GOOG Revenue (Quarterly YoY Growth) Chart

GOOG Revenue (Quarterly YoY Growth) data by YCharts

$googLong Google (GOOG)

Google has been on a good run and while it remains more than anything else, a company that dominates search and makes most of its money by showing ads on those pages, there are more and more “potential seeds”. Things like its Android presence, its Youtube channel, its different Google X projects, etc. Some of those will end up generating solid growth and for that reason, I think Google does deserve a valuation premium.  Costs are rising a bit faster than I’d like to see but I am becoming a believer in the “Page doctrine” and do think some of those initiatives will end up paying off.

GOOG Chart

GOOG data by YCharts

Next earnings release: October 17th 2014

$NILEShort Blue Nile (NILE)

Over the years, I’ve been a Blue Nile doubter and have probably shorted it more than any other stock. I’ve pulled back on that quite a bit this year. Part of is the decline in the stock making it less “overvalued” but the earnings growth has also been strong making it a riskier short. That being said, when I compare the valuation of a stock like Blue Nile to Google, it does still look expensive and this week seemed like a good option to go for. Earnings growth is important but I’m a strong believer in the revenues growth being a critical metric and from that perspective, it’s been disappointing.

NILE Chart

NILE data by YCharts

Next earnings release: August 1st 2014

Disclaimer: No positions on Google (GOOG) or Blue Nile (NILE)

Closing Trade ($EXPE, $TZOO)

avatar By: IS
Date posted: 07.21.2014 (2:30 am) | Write a Comment

Over time, I’ve grown more and more sceptical of businesses that have little to no barriers to entry. Travelzoo (TZOO) feels like one of those businesses and the most recent earnings release was very bad. I don’t see any of that changing in the near future. This morning, I’ll still be closing out this trade on Expedia (EXPE) and Travelzoo (TZOO), taking profits off of the table on this one.

TZOO Chart

TZOO data by YCharts

As always, you can see our 2014 long & short stock picks here:

http://www.intelligentspeculator.net/livetrades

Weekend Readings

avatar By: IS
Date posted: 07.18.2014 (3:00 am) | Write a Comment

General Readings

-How Russian hackers stole the Nasdaq @ BusinessWeek

Tech Stock Readings

-Kara Swisher, a tech journalist legend @ NYMag
-Amazon a friendly giant as long as its getting fed @ NYT
-Uber, Lyft and reinventing the ride @ NYT
-Box, Uber and 29 cent tacos @ joshhannah.com

New Trade: Long Apple ($AAPL) & Short Yelp Inc ($YELP)

avatar By: IS
Date posted: 07.14.2014 (3:00 am) | Write a Comment

Last week I was able to close out 3 different stock picks, all winning ones which I was obviously thrilled with. The year-to-date performance (before fees) of this portfolio is now +23,81% which is very solid. I do intend on keeping the streak going but the next few weeks will be very interesting as most of the stocks I follow will report earnings. Google, Yahoo and eBay are among those reporting next week!!

I discuss these type of things as well as give my thoughts on the tech stocks in my free email newsletter, feel free to join here:

You can also see my live trades here:

http://www.intelligentspeculator.net/livetrades

Today is a bit of a different type of trade as I match up one of the lower P/E stocks that I follow with one of the highest ones. That means they have very different levels of growth of course which has to be taken into consideration but also look carefully at these numbers and how much more you’re getting out of Apple (revenues and earnings per share) compared to Yelp. At this rate of growth, it will take a very very long time for Yelp to play catch up….

Ticker
Name
Price
PE Ratio
PE Next Year
Return YTD
Sales Growth
Analyst rating
Book Value
Beta
Revenue/Share
Sales 5Y Avg Growth
EPS 5Y Avg Growth
AAPLApple Inc95.2215.913.6719.959.24.2319.920.926.3941.2353.24
YELPYelp Inc70.62N/A80.032.8469.364.396.992.023.55N/AN/A

AAPL Revenue (Quarterly YoY Growth) Chart

AAPL Revenue (Quarterly YoY Growth) data by YCharts

$AAPLLong Apple (AAPL)

Today I was asked by a friend what my top stock pick was these days. A few months ago he had suggested I look at Gazprom which has done extremely well since the start of the Russian crisis. I still think it’s a solid pick but it was even better then. I liked the pick, it was original, controversial and it worked. That being said, as much as I would have liked to pull one of those off, I went with Apple. Despite its very solid performance this year, Apple remains a great upside vs downside play and I can’t think of many better plays at the moment. Apple trades at a discount to the S&P500 in terms of P/E ratio which I can’t justify.

ycharts_chart (3)

Next earnings release: July 24th 2014

$yelpShort Yelp Inc. (YELP)

Over the years, I’ve been at best neutral about Yelp. There were the rumours of shady tactics towards advertisers,  a reliance on players like Google for traffic. Of course, with many big players such as Google (GOOG), Facebook (FB), TripAdvisor (TRIP) and Priceline (PCLN) (through its OpenTable acquisition) making very strong moves to better compete with Yelp, it’ll be a big challenge for the company to justify its sky-high valuation.  Depending on Google’s search engine for much of its traffic is not surprisingly a big challenge given how they now compete. Just look at this Techcrunch article about leaked documents and you’ll get an idea. The same is likely happening on other platforms. Yelp has little to no control in those platforms.

When you think about the fact that Apple’s price/share is 35% higher than Yelp’s but its revenues/share are almost 650% higher, you can see why I think Yelp will have an extremely tough time justifying its 80 forward P/E.

ycharts_chart (4)

 

Next earnings release: July 31st 2014

Disclaimer: Long Facebook (FB), Apple (AAPL)

Weekend Readings – Tanaka Out

avatar By: IS
Date posted: 07.11.2014 (3:00 am) | Write a Comment

tanakaWow..just as Yankees fan like myself were getting excited by Masahiro Tanaka, he gets injured and could be out for the rest of the year… Here are some happier things to read about:)

General Readings

-Betting on the Ponies @ ReactionWheel
-Are you the best trader ever? @ IrrelevantInvestor
-The 40 year evolution of the American stock market @ Quartz
-What is Espirito Santo? @ MoneyBeat

Tech Stock Readings

-Tim Cook’s the main now? @ WSJ
-The real meaning of the Fire Phone @ Musings


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