MorningWord 7/28/16: What’s App with Facebook (FB)?

by Dan July 28, 2016 10:22 am • FREE ACCESS

Facebook (FB) blew the doors off their Q2 results. I think it is safe to say their were few investors, analysts and pundits who did not expect them to, so congrats to all.  Last night immediately after the results shares of FB were trading above $131, from a $123.34 close that was an all time high, but the stock is now up only 3% at $127, well below the 6% implied move. While I suspect the stock does not close here, it would be truly remarkable if the stock were to work through some early profit taking and close at the highs.

The chart below since last July shows the stock’s last three post earnings reactions that saw the stock make a new all time high on the gap, but was soon met by consolidation and/or pull back in the days/weeks to come:

From Bloomberg
From Bloomberg

If history is any guide, buying the post earnings gap is not the way to buy the stock.

In my quarterly preview yesterday, as I have done prior to each of the last few quarterly reports I have highlighted the universal bullish sentiment towards the company and the stock, with obvious expectations that at some point in the not to distant future investors will be faced with the following situation on an earnings report:

And at some point, FB’s eye-popping revenue growth will decelerate greater than expected, monetization will be less than expected, and costs will be greater than expected. The stock will gap 10% lower as investors with massive gains, and long memories will shoot first and ask questions later. They know it is one of the most crowded trades in tech. I have no idea whether that will happen tonight, or on their Q3 call in Oct or their Q4 call in Jan17, but it will happen, but possibly from much higher levels.

Maybe that is less than helpful, especially when you consider that recent results suggest that FB will see revenue growth re-accelerate in 2016 from 44% yoy in 2015, or about $18 billion, down from 58% growth in 2014 to 50% growth in 2016 to close to $27 billion.

To get a sense for just how extraordinary that is, let’s look back at GOOGL’s ramp to similar revenues. In 2009, GOOGL’s sales hit $17.5 billion, up only 10% from 2008, which was a massive downshift from their 60% growth the prior year. In 2010 GOOGL’s sales grew 26% to $22 billion, and grew 32% in 2011 to $29 billion.  GOOGL is expected to print $71 billion in sales in 2016, a 17% increase yoy, which is truly astounding, but on its way, the highest yoy sales growth rate sine 2007 was 37% in 2012, and now it is unlikely we will ever see a 20% plus print again.

Plain and simple, FB’s ramp to $20 billion, and then to $30 billion is happening at far greater velocity than GOOGL. And that’s for one big reason, the explosion in smartphone usage, and FB’s positioning on the device with what has emerged as three of the most used Apps on the planet (FB, Instagram & WhatsApp).

Lastly, from my preview, which the intent was by no means to throw shade on the stock (I thought up was a much more likely scenario than down), I noted the stark contrast of FB to the handful of other megacaps who fill out the largest weighted stocks in the S&P 500:

With a nearly $350 billion market cap, it ranks in the top 10 largest companies in the world behind Apple, Alphabet, Microsoft & Exxon, and switching spots daily with Amazon and Johnson & Johnson.  That’s truly astounding when you consider FB is expected to book $26 billion in sales in 2106, vs $216 billion for AAPL, $71 billion for Alphabet, $94 billion for Microsoft, $227 billion for Exxon, $134 billion for Amazon and $72 billion for Johnson & Johnson.  I know, I know they are growing sales at 45% a year, have a near monopoly with 85% gross margins, what could go wrong? The answer is lots. But again, from where?  GOOGL’s sales are expected to increase 17% this year to $71 billion and trades at 7.2x those expected sales, FB’s are expected to rise 45% to $26 billion and it trades nearly 2x on a multiple of sales at 13.2x.  I might have said the same thing at every all time high before FB was about to report over the last year, but I’d prefer to own GOOGL over FB as one is priced to perfection and the other is priced for growth at a reasonable price