Last night, Facebook (FB) announced Q4 results that were by most accounts phenomenal, punctuated by record quarterly sales of $8.8 billion (a number equal to Netflix’s entire 2016 revenue haul) that grew 51% year over year. The stock was trading at new all time highs, near $137 in the after market. Until the conference call. On the call, management reiterated their message from the Q3 conference call (in early November) that this “will be an aggressive investment year” and that they continue to expect the “ad revenue growth rate will come down meaningfully in 2017”. The stock gave up most of its after market gains (up 1% as I write vs the implied one day earnings move in the options market of about 5%, yeah the day has yet to begin), but these comments should not have been a surprise, and maybe just maybe the stock’s nearly 16% one month, year to date gains discounted any and all good news.
It will be fascinating to watch to day whether or not investors disregard management very fair warning about slowing ad growth and higher operating expenses and the stock establishes a new range above the prior all time highs from October, or if simple techncials rule the day with the stock being rejected at would could be fairly ovbious technical resistance:
My take on FB at all time highs is fairly simple, the commentary the company gave should be taken at face-value. FB is the 5th largest stock by market capitalization in the S&P 500 (about $390 billion), bigger than freaking Exxon, management has laid out a 10 year plan, they have yet to monetize in a meaningfull way WhatsApp, Instagram and Oculus Rift and I suspect they continue to use their currency, their stock, which shareholders have afforded them to continue to make acquisitions to gain further reach into their 1.86 billion monthly active users everyday digital lives, until they can crack China’s 700 million strong internet users:
Facebook is pulling out all the stops to reenter China. Nothing is working. https://t.co/2dwgiGbaHp
— Wall Street Journal (@WSJ) January 30, 2017
So as I said last night on CNBC’s Fast Money, I see little reason to run for the hills after those results, and what seems like realistic, if not potentially overly cautious guidance. But after the stock’s ytd run, it makes perfect sense that the stock could pullback mildly and consolidate recent gains. That said, this is a massive year for FB, analysts expect revenue growth to decelerate from 54% in 2016 to 34% in 2017. Snapchat is coming, and coming in a big way. Once their IPO debuts they will need to prove to the investment world that they too can monetize their 160 million daily active users and justify a public market capitalization that could near $25 billion on its debut, or 25x expected 2017 sales (its all guess work at the moment until the company publicy files for their IPO). FB has to demonstrate to the world that they can handle fake news in the West (especially Russian sponsored, with important elections across Europe), while also justifying looking the other way in the East as Chinese regulators censor real news and push government sponsored fake news
Which brings me to a short discussion on last night’s Fast Money about Twitter (TWTR), the stock’s set up into next week’s earnings and the potential for Snapchat’s impending IPO to highlight the relative cheapness for a digital asset with 300 million active users (trades less than 5x its 2016 sales of $2.5 billion and has an enterprise value of only $10 billion):
— Dan Nathan (@RiskReversal) February 2, 2017
Google has shown little interest on building social and mobile messaging apps, where FB certainly has. Maybe TWTR would be a very easy $15-$17 billion acquisition for FB, and maybe Jack would be happy to move on and focus on Square (SQ). Just sayin’.