The Proof Is in the Pudding
By Michael Comeau
(NASDAQ:FB) numbers, particularly in mobile, were so strong that any bear with a brain must reconsider his or her thesis. There's been a lot of commentary -- including some from me -- about the "known knowns," like the slowdown in growth of the user base, but the proof is in the pudding. Advertisers are pouring money into Facebook-centric initiatives, and that means that the company is seeing a huge expansion in audience monetization.
The obstacle going forward, however, is that expectations have been ratcheted up big-time, and this huge quarter will be a hard act to follow.
From a bigger picture perspective, I think a lot of folks just got a lot more excited about the seemingly inevitable Twitter IPO.
Michael Comeau edits Minyanville's Buzz & Banter and is also a regular columnist on Minyanville.com, focusing on technology and consumer stocks. Read more of his work for Minyanville here.
The Mobile-First Strategy Has Paid Off, but the Move Higher Was Overdone
By Andrew Keene
After Facebook announced second-quarter earnings that were above analysts' expectations, the stock surged higher in after-hours trading. Facebook had a lot of skepticism to deal with prior to its earnings report due to the uncertainty of how much revenue the company would receive from its mobile application. However, much of Facebook’s recent success can be attributed to an increase in mobile usage, which grew much faster than expected. With the amount of mobile users expanding by 51% over the last year, the company has gained roughly 41% of its revenue through mobile advertising.
The new strategy for the social network to be a mobile-first company has clearly paid off. While the company moves forward, it will continue to look for ways to use the mobile device to entice new advertisers. As the number of people logging into Facebook on their phones exceeds the amount of those on a PC, this is a growing marketplace for the company to gain untapped revenue.
Facebook posted an EPS of $0.19 on revenues of $1.813 billion. This was above the company’s expected earnings per share of $0.14 on revenues of $1.62 billion.
While the quarterly results were impressive, I believe that the move higher was overdone and that the stock will trade below $30 before it trades above $38. I believe that there will be a lot of profit-taking at this level, and that the change in sentiment is going to be short lived.
Andrew Keene is president of KeeneOnTheMarket.com. Andrew has been a market maker on the CBOE floor for the past decade and at one point, was the largest on-floor independent Apple options trader in the world. Read more of his work for Minyanville here.
Ad Revenue May Not Be Sustainable
By André Mouton
Facebook accomplished two things in Q2. First, it deployed more advertising without scaring away users. Active daily users actually rose as a percentage of active monthly users, indicating that they became more engaged. A lot of people expected this to be a weakness for Facebook -- myself included -- but so far, it isn't. That's a positive surprise.
Second, Facebook convinced advertisers to cough up more money, despite a general decline in ad effectiveness. Spruce Media estimates
that CTR (click through rates) fell across the board during the quarter, while CPM (cost per thousand impressions) generally rose. The result was a 74%-76% rise in CPC (cost per click) for Facebook's news feed ads, which were the big success story this quarter.
The question is whether this growth is sustainable. There are already signs of price weakness in desktop news feed ads -- which were introduced first -- and mobile may follow. If ad effectiveness continues to decline, the damage will be worse. A more general problem is that, once an advertiser has accumulated "likes," it now possesses a social network that it can advertise to -- for free. After a few ad campaigns, there may be little reason to continue buying space. In other words, Facebook's ad revenue may be front-loaded.
André Mouton is an independent investor who cut his teeth in the dot-com crash and chewed his lip in the financial crisis. He is a former writer for
Offbeat magazine in New Orleans and a touring (but not itinerant) musician, who now lives in New York. Read more of his work for Minyanville here.
Without Some Wild Card Event, the Stock Will Likely See a Consolidation Phase
By Justin Sharon
Facebook's immediate post-earnings performance was undeniably impressive, although a sense of perspective is always important. If Rip Van Winkle had fallen asleep for 14 months immediately after its $38 per share “IPO of the century,” only to awake in time for Thursday’s 29.61% surge, he would surely be furious to learn such a stellar showing left it at the lofty heights of…$34.36.
Of course, memories of its infamously botched debut are receding fast on Wall Street, where it is all about “What have you done for me lately?” (Especially in the Internet sector.) As such, the company is entitled to crow over an extremely robust quarter, the unexpected strength of which can be seen in a string of subsequent analyst mea culpas
The undeniable standout was its $657 million in mobile advertising revenues, which easily exceeded consensus estimates. Facebook has endured past problems in trying to monetize mobile, but the fact that this medium now accounts for fully 41% of total ad revenues suggests that the company may have finally cracked it. News feeds also put in an encouraging performance. Also, for all the talk of “Facebook fatigue,” over 1 billion monthly active users remain addicted. And the teen demographic, said to be deserting in droves for more "trendy" platforms, remained a surprisingly stable user base.
That said, the glass-half-full camp still has plenty to cling to, as evidenced from Friday’s swift downgrade at Argus. Ever more pervasive mobile ads could end up alienating users, and they command fewer advertising dollars than their desktop equivalents anyway. Much ballyhooed new products such as Home and Graph Search have yet to gain meaningful traction. Instagram may be buzzworthy, but it remains anything but a cash cow. Comparisons become undeniably more difficult going forward. And Facebook’s revenue from games slowed to only 7% annually; the woeful way Zynga
(NASDAQ:ZNGA) ended the week is a cautionary tale here.
A well-received wild card event, such as its potential addition to the S&P 500
(INDEXSP:.INX), should see another leg up on the stock. For now, however, a consolidation phase of back and filling likely lies ahead.
Justin Sharon authors Minyanville's stock upgrades and downgrades articles every morning. He has extensive experience on Wall Street, most recently at the Private Client unit of Merrill Lynch. A 12-year spell in its research department encompassed the eras of Blodget, boom, bust, and Bank of America. Read more of his work for Minyanville here.
A Blast From the Past
By Sean Udall
Originally Published on January 23, 2013.
Facebook makes both my high-conviction list and also my Top Spec list. I certainly believe the stock will retake the $38 IPO level, and that would be a strong performance in the mid 30s percent range, which could get it onto my Top Spec list. However, I don't see the stock stopping in the $33-38 area where many analysts see it. Frankly, I see the stock getting to 50% of total revenues being mobility-based by the end of 2013 (and likely earlier); to me, that means the stock should be closer to $50 than that $38 IPO price. Therefore, a near 100% move should be enough to get FB on both lists.
Facebook Has Legs to Go Much Higher
Also By Sean Udall
Facebook has, in my view, produced three good-to-great quarters in a row, not to mention all the years it took to build it before it went public.
As I said in my last webinar
, FB and Google
(NASDAQ:GOOG) have the game, the set, and nearly the match. They are number one and two in nearly every online advertising vertical. The rest is left fighting for scraps or figuring out how to do deals with these two companies. Thus, investing and trading in them is about timing, valuation, and technicals, while investing around them for the time being will probably be an exercise in futility (I'm talking the internet space specifically here).
In fact, the only company right now that I see with the ability to challenge either FB or GOOG in most of their verticals is Apple
(NASDAQ:AAPL), because AAPL has the second-largest installed base of connected/paying/engaged users. But time will tell if AAPL chooses to challenge FB and GOOG, though the company is probing a couple of verticals around the edges.
So why might I buy any FB back or possibly even add to it? Simple: $32.50 is a key breakpoint. And after that level, there is really no resistance until $38 and that is where I'm pretty well convinced the stock will quickly go. Also, FB now isn't about just one good quarter; it's about a string of them, and the smart money has been talking about this along with me. In fact, I think we will now see a lot of big money move into FB from some older, slower growth names. And many growth fund managers now have to add the name. Lastly, given the last quarter, I'd much rather be in FB than GOOG over the course of the next quarter. Then as we get closer to the coming reports, start building GOOG back up and shedding FB around or above that $38 IPO price.
Bottom line: This was a home-run quarter for FB, but not the first one. The stock is going higher and probably going to do so in rapid fashion. Above $32.50, we have a very nice no-resistance zone until 38. Then once this stock starts looking expensive at 38 and above, it will probably actually explode even higher.
Sean Udall is an Investment Strategist, Portfolio Manager and Proprietary Trader with extensive experience across a wide variety of asset classes, including equities, fixed income, currencies, and derivatives. He’s a recognized trader, prolific writer, and the founder of the TechStrat Report, a Technology Focused investment newsletter from Minyanville. Read more of Sean's commentary here.