"They may be investing heavily in the short term in their business (both new people and the existing platforms), we like that in the long run. The business will in the coming years have four core platforms (Facebook News Feed, Facebook Search, WhatsApp and Instagram) with a billion people across both platforms, there is no other business of that sort."
To market, to market to buy a fat pig. Another good day for equities markets, locally and beyond, the Dow Jones industrial average topped 17 thousand again for the first time since the beginning of the month of October, the broader market S&P 500 is closer to levels of late September. The period of great angst, Ebola, Hong Kong protests (we are now at 30 days I think), and a whole host of other reasons, perhaps the most important being rates going higher seems to have passed, at least for now.
The angst can always return quickly, I have been doing this long enough to know that almost anything can put the cat amongst the pigeons. Over three months the S&P 500 is flat. Over a year the same index is up 12.8 percent. It obviously always matters what rates are going to do, that sets the tone and the economic outlook, company earnings will always set the absolute levels of the market however and what the broader market participants are willing to pay at that moment in time.
We can presume that a 12 month forward multiple is acceptable, what people are willing to pay today for the earnings that will be delivered in 12 months time, that is not too hard to presume reasonable for most people. So what exactly is that multiple? The go to person for me for this sort of research is a fellow by the name of Ed Yardeni, you can find his research on the inter-webs, where he supplies a week to week earnings estimate of the S&P 500 forward.
The last 12 months estimate for earnings as a collective as at 23 October was 128.73 Dollars, revisions downwards from the prior week. For the 2015 full year the number is 131.03 Dollars, that means at current levels on the S&P 500 (1985 close last evening), the market trades on a 12 month forward multiple of 15.4 times, for 2015 it is closer to 15.15 times. Again, that is not expensive by historic standards, I would definitely like to believe as we embrace the internet age that we will be a lot more efficient than before. I cannot imagine that anyone can think that 1984 equals 2014 from a productivity point of view, from the collective wealth of consumers globally and of course the sheer numbers and openness of global trade.
The very best time to have bought stocks on a contrarian view using the current earnings S&P 500 ratio would have been May of 2009, when the valuation was a screaming 123.73 (source -> S&P 500 PE Ratio), the lowest point in the existence of the index was December 1917, when at 5.31 times I can imagine that "things" were looking pretty awful for the US, even though the war to end all wars would have been finished inside of a year. Of course at the time the Americans did not know that, nobody knew that. I do not like to use history to determine what is going to happen next, that suggests that we do not evolve. We all know that is not true, perhaps by 2025 there really will be a community on Mars, the Mars One project. Wiki suggests that 7 functioning aircraft are currently at Mars, two of them on Mars.
The truth is that we all want returns today/next week/next month/next year to drive the value of the equities that we own to better and better levels. If you are constantly adding to a portfolio over a period of years you would want equity prices to go backwards and earnings to go forwards, the two rarely happen at the same time for too long, the market rerates higher if earnings are trending higher, and continues lower if earnings trend in that direction. I have seen the reluctance of people to add to their existing holdings if equities perform poorly, emotions get in the way of investing common sense. Stick to your investment plan. Always.
Did you see Mark Zuckerberg in an interview at Beijing's Tsinghua University? If not, here it is, a condensed first part of the interview: Watch Mark Zuckerberg Speak Mandarin. I love the crowd reaction, I have read that his mandarin is not great, he seems to be understood and it is far better than most of the languages that I can speak! As he points out, his wife and her family are Chinese, so he needed to communicate with all of them, hence the need to learn the language.
This is not a piece on the Zuck however, he is seemingly a private person in that part of his life, hence the ability to shock people with his skills. Whilst he is a private person, in the information segment about Facebook, the founder and CEO's Facebook page (link above to the Zuck) can be used as means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. That is right, on his Facebook page he has 30.5 million followers. His recent activity includes the aforementioned university Q&A in mandarin Chinese, a meeting with the Japanese PM, Shinzo Abe and visiting one of Samsung's manufacturing facilities in South Korea, he has certainly been busy!
When the Zuck founded/conceptualised/built the company in his dorm room over a decade ago, who would have thought that there would be 1.35 billion monthly active users connected across the planet, with 864 million active daily users. That last number represents a 19 percent increase year over year, as the base grows the user growth has to start moderating. In mobile the growth rates from a user perspective are pretty impressive, there are currently 1.12 billion active monthly users, that is up 29 percent year over year, indicating that many people who have a Facebook account interact more and more on the move.
The company reported post the market last evening, revenues registered 3.2 billion Dollars for the quarter which was a fairly remarkable 59 percent increase year over year, most of that advertising revenue (2.96 billion Dollars). Costs and expenses soared 41 percent from the comparable quarter, non-GAAP net income grew 73 percent to more than 1 billion, 1.15 billion Dollars. On an adjusted non GAAP basis, EPS registered a beat of 43 cents for the quarter. Of course the company does not pay a dividend for the time being, more on cash utilisation in a bit.
All the metrics looked good, everything looks like a beat to me, so why is the share price trading down 8.2 percent? A lot of what was revealed was on the conference call, you can get the whole interview from SeekingAlpha (you will have to sign up for free): Mark Zuckerberg on Q3 2014 Results - Earnings Call Transcript. The falling short of the guidance for the next quarter is possibly one of the two reasons for the fall in the share price.
The plan to invest heavily in some of the businesses that the company has acquired, with the goal, as the Zuck says on the conference call, to "make Facebook a cross platform that allows developers to build, grow and monetize their apps across every major mobile platform" over the next few years. The longer term goal, the ten year goal is to continue to connect the world. Internet.org, providing a platform to help with the "things" that developed world people take for granted, sharing of health services and improving education leading to better employment prospects.
Facebook costs are going to rise significantly next year as they invest heavily in Oculus and WhatsApp (expected to get to 1 billion users in the coming years), as well as the existing core business. More investing equals lower profitability in the short term, we previewed Amazon.com of course just the other day, they continue to invest heavily in their business. Something interesting on the conference call that the Zuck said: "Some of the things like Search and some of these other products, this may sound a little ridiculous to say, but for us, products don't really get that interesting to turn into businesses until they have about a 1 billion people using them." News feed is there, but nothing else yet, obviously WhatsApp, Search and of course Instagram.
E-Marketer suggests that Facebook continues to capture the mobile market ad share (remember when the anxiety was that they couldn't monetize mobile, that is now two thirds of revenue!!!!), the age and gender targeting of the Facebook adverts is much more accurate and pointed than their peers. More people will use the platform. Think for a second about the average revenue per month of the average monthly users (1.12 billion). 3.2 billion Dollars for 91 days, roughly 1.067 billion Dollars a month. ARPU's are a mere 95 US cents. There is definitely a tipping point at some level here, more aggressive monetisation of the platform.
Do not think of their platforms as somehow a way that people sink themselves into an information world, escaping from the real world. It is the real world, you can just see it instantaneously from wherever you are. I read in the earnings call that the average Instagram user spends 21 minutes a day on the platform, looking at pictures is addictive. That is roughly the same as your favourite sitcom, the time, of course the Instagram experience is completely personalised! Think of the platforms as yet another form of communication, I would not know what my old school mates were up to if it was not for Facebook and WhatsApp.
We maintain our long stance on Facebook, they may be investing heavily in the short term in their business (both new people and the existing platforms), we like that in the long run. The business will in the coming years have four core platforms (Facebook News Feed, Facebook Search, WhatsApp and Instagram) with a billion people across both platforms, there is no other business of that sort. The eyeballs and users are there, the talent at the company will look to monetize the user base more and more over time. We maintain our buy recommendation.
Things that we are reading, that we think you should be too
An interesting look at how society has their priorities skewed when it comes to spending money - What Happens If We Make Wealth Transparent?
The internet is changing things by allowing us to find what we are looking for or by being on sites like Facebook that show you what they think you are looking for - How Facebook Is Changing the Way Its Users Consume Journalism. The article highlights the power that the algorithms have over the content that we see and probably have some influence on the way we see the world.
Home again, home again, jiggety-jog. Today the Federal Reserve will deliver their conclusion to their current meeting, one of 8 scheduled meetings a year, with one unscheduled meeting. Roughly every 45 days, this becomes like a fair of some sort, interpreting Fedspeak and how they will tweak their outlook and the like. I read the statements, I do not try and interpret them, the people at the Fed are best equipped to deal with their jobs, not the people that sit in the armchairs and shout what they should be doing.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
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