You've probably seen the news at Facebook. The stock is down 20% in after hours trading (after hours volume is notoriously thin so we’ll see better indications tomorrow). Why?
- User growth was less than expected
- Revenue growth revised down in 2H 2018
- Expenses up
- Missed (only slightly but there’s little margin for error with a stock like FB) advertising revenue target
- Headcount up 47% YOY
• Some negative comment about the EU privacy regs General Data Protection Regulation (GDPR…expect to hear more of this) where they lost 1m subscribers due to the new rules.
• Quotes from the transcript (here) that probably didn't help:
“…deceleration in ad revenue growth, kind of consistent with the trends we've seen” CFO
“…because the effective levels of monetization in Stories [videos and photos with a story; disappears in 24 hours] are lower.” CFO
“We're being very slow and deliberate with monetization [with Messenger]” COO
“But we won't know for a while if it's going to monetize at the same rate [when FB places stories across Messenger, Facebook and Instagram]”. COO
“[Europe monthly average usage (MAU) was down] On Europe, yeah, we don't have any update on trends. We had indicated in the first quarter that we would expect to see a decline. We're not providing any guidance on MAU and DAU in Europe on this call.” CFO
Some of the +30% growth days must be numbered. This is a stock that's under regulatory scrutiny but, unlike Google, the facts aren't known yet. There wasn't one reason for the miss…just lots of small ones such as privacy, currency, new ad formats etc. Since 2013, revenue and expenses have “beat” (i.e. been better than forecasts) by 5% to 7%. This time they missed by 1% and 2%. So, that's new for them.
FB has a very strong balance sheet. More than $50bn in cash which is half the balance sheet. Operating margins dipped but are at still at 44%.
- new products
- management tends to guide low
- mobile ad volume
- ad pricing
- not overly expensive
- regulatory problems will grow
- slower growth
- expenses higher
- opting out/privacy issues
We’ve written about the FAANGs a fair amount in recent blogs. They’re big, profitable and growing. But there are high expectations around the stock and it sells at 75% more than the market and 85% more than Apple.
It’s one reason why we like small cap and the dividend Aristocrats. They lag when Big Tech is on a run but they're less likely to have a big sell off.
Action: Many clients have low cost positions in FB, so selling is not always an option. The stock is not going to crash. It’s a 20% correction so needs a 25% increase to break even. We'd certainly trim where possible if only for diversification reasons and we can help on that. Also, if you have tax gains elsewhere, or want to create a loss to offset some current income, we can help on that too. But otherwise it’s a HOLD.
If there’s more, we’ll include it in the blog. If you need more, please let us know.
High ROE, EPS growth of 40% and large cash position
--Christian Thwaites, Brouwer & Janachowski, LLC
Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice. We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security. The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended. Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data. Past performance is no indication of future results.
All charts from Factset unless otherwise noted.