"Last evening Facebook reported results, you can view them, of course via their IR website which looks distinctly like Facebook itself -> Facebook Q4 and Full Year 2014 Earnings. There are some important metrics. Can we have a look at the quarter and year separately, mostly as a result of the company growing so quickly. Annual revenue grew by 58 percent from the prior year, operating income grew to 4.994 billion Dollars from 2.804 billion the year prior. Net income for the year nearly doubled to 2.94 billion Dollars, operating margins grew from 36 percent to 40 percent in 2013 to 2014. On a per share basis, excluding special items and stock compensation, EPS grew from 93 cents to 177 cents. The stock I guess is still steeply priced at (the after market price) of 74.85 Dollars on a 42 multiple. On a GAAP basis (nerds unite, we're moving to convergence), the company earned 110 cents, the multiple is a more eye popping 68 times."
To market, to market to buy a fat pig. A big day for the local equities markets yesterday, led by financials and industrials, the local market closed above the 51 thousand point mark. Guess who announces their outlook for the medium term today, no doubt revised against the backdrop of a vicious fall in oil prices? The MPC, our committee set up of 8 members of the central bank, the governor, three deputies and four other senior ranking officials. I thought it was seven, the SARB website distinctly says 8, in the members column there are only seven and that includes a vacant deputy governor spot. Anyone up for the job? Whilst last evening the FOMC had possibly the least interesting announcement in a while, this one is likely to highlight how cheaper energy costs is having a positive impact on the country. And by cheaper energy, I do not mean electricity, I mean the petrol that you stick in your car. It is a regular occurrence, you run out, you are stranded. Until this point in time we have not with any great deal of success changed that.
Over the seas and far away it was another day of heavy selling for the energy stocks specifically, down 3.6 percent as a collective. Yowsers, NYMEX WTI crude oil is at 44.51 Dollars as a I write this, Brent is at 48.63 Dollars a barrel. Not all oil is the same. Brent in fact is an acronym for the formation layers of the oil field in the North sea, being "Broom(oseBerg), Rannoch, Etive, Ness and Tarbert." WTI stand for West Texas Intermediate, it is actually lighter than Brent. Most of the major pipelines for oil converge in a tiny town in Oklahoma, a place called Cushing. It could have been gushing, not so? Don't stress, it all has to do with the different relative weights, the sulphur content and of course, where it comes from and the demand, that ultimately sets the price. To get yourself more into the subject (impress your friends, after this you will have none) then check out all the different grades via Wikipedia: List of crude oil products. Here locally we use a referenced price in Dubai, we should pay more attention there. Although the truth is that they all trade close enough to one another.
So why did the oil price fall in a heap and drag the rest of the US market lower with it? The clues (if you are a central bank statement sleuth, the modern day Sherlock or Poirot) are supposedly to be found in the Federal Open Market Committee release. Like every other watcher of these supposedly important data points, inflation, jobs, general improvements in the US economy, jobs and the list goes one, productivity, money supply and so on, the Fed will make up their minds when they are sure that they can start raising rates. The timing needs to be right, many armchair critics always blame the Fed for X or Y, Greenspan this, Helicopter Bernanke that, I always find it amusing that in the end it is all "fine".
I can understand that for many, fixed income markets are a whole lot more important than equities markets, in fact the outstanding US market issuance (according to sifma) is 38.4 trillion Dollars. Relative to their equities market, which is around 21.13 trillion Dollars, the bond market is far bigger and more important, for now of course. Treasuries account for 32.3 percent, mortgage related debt at 22.7 percent, corporate debt at 20.1 percent. There is more mortgage related debt in the US than corporate debt, does that make you feel better or worse?
Remembering that total US GDP is 17 trillion (that is each and every year), the measures can be used in any way, in other words whilst some people might say oh, the US equities market is 120 percent of GDP, let me panic, others might say, well Apple is the biggest stock and 65 percent of their sales are outside of the US, perhaps the old ratios are no longer as valid as they were in the past when the world was a little more isolated and countries more insular in their trade. The market is not the economy. To finish off, before we dive into matters of a company nature, the broader market S&P 500 lost over a percent and a third, the nerds of NASDAQ less than one percent whilst the blue chips measure, the Dow Jones lost 1.13 percent on the day, all in the last part of the session, post the Fed's release. All this against the rise of Apple, which added 5.94 percent on the session.
Byron asked why did the US sell off last evening, the Fed did very little, did they not? My explanation was simple. Fed says they will take their time, they might = stronger Dollar = weaker commodities prices = energy sector sell off = sentiment spreads to rest of market = broader sell off. Understood? He said it still doesn't make sense..
Facebook. Most people, even your grandmother, has heard of it. Do you not want to be friends with your grandmother on Facebook, what is that all about? The service works seamlessly in the background whilst many users of what has become a transformative and useful service are not too aware of the company dynamics. I mean that from a profitability point of view. Sure, you know that Mark Zuckerberg is crazy rich and just around 30 years old, you know his wife is Priscilla, they live in a fairly modest suburb considering his personal wealth. His dog, Beast, has many more likes (2,127,338 when I checked this morning) than your business or organisation is likely to have. Beast last posted on the first of January, before that in September, when it was bath time. The truth is, and Facebook confirms this, people are interested in people and their goings on, the conversation does not have to be Philosophy 301.
Last evening Facebook reported results, you can view them, of course via their IR website which looks distinctly like Facebook itself -> Facebook Q4 and Full Year 2014 Earnings. There are some important metrics. Can we have a look at the quarter and year separately, mostly as a result of the company growing so quickly. Annual revenue grew by 58 percent from the prior year, operating income grew to 4.994 billion Dollars from 2.804 billion the year prior. Net income for the year nearly doubled to 2.94 billion Dollars, operating margins grew from 36 percent to 40 percent in 2013 to 2014. On a per share basis, excluding special items and stock compensation, EPS grew from 93 cents to 177 cents. The stock I guess is still steeply priced at (the after market price) of 74.85 Dollars on a 42 multiple. On a GAAP basis (nerds unite, we're moving to convergence), the company earned 110 cents, the multiple is a more eye popping 68 times.
Number of users, that is important right? And I guess that the daily users, which as per the slide below, from the slide presentation represent 64 percent of average monthly users. Daily users are exactly that, daily users. They are pretty much across the globe too, well represented across all territories, as per the slide below:
Not all two customers are the same, different territories and societies adopt different methodologies either quicker or slower than one another.
There are more users in the faster growing and more populated Asia, on a per revenue basis however, the North Americans (US and Canada) absolutely smoke the rest of the world. The Facebook ARPU measurement is a pretty standard one, it is a monthly number. On that measure, the geography that we fall into Rest of World, registered a pathetic 94 US cents, per month. The US and in Canada, that is 9 Dollars per user per month. There is plenty more scope for growth here across all of their territories.
And then the number of users, as per the prepared comments from chief, number 1, Mark Zuckerberg: Facebook 4Q 2015 Earnings Call Transcript: "1.39 billion people now use Facebook each month and 890 million people daily, an increase of 165 million monthly actives and 133 million daily actives this year. Time spent per person per day across our services continued to rise, growing this quarter by more than 10% compared to last year and this doesn't even include WhatsApp, which joined us late last year. "
I think that point is well made. When we think Facebook, we do not thing Instagram and particularly not WhatsApp. And almost never Oculus, which certainly does have the opportunity to change the way that we do a lot of business. You can get all of your executives to stick a set of the glasses on and "meet" across the globe at a much lower cost in terms of time and resources. Cisco of course has great technology in terms of the virtual boardroom, I think that this application has many more uses, mostly entertainment.
The stock ended lower in the aftermarket, the jump in expenses is the problem. The headcount grew 45 percent last year. Wow. Research and development costs have jumped sharply, as have marketing and sales costs. These are concerns for short term watchers, however, if you have not been convinced, let me try convince you quickly. As Michael said across the desk, they are not concerned about building a business for the next quarter, they are building a business for the next decade and beyond. The IPO was a disaster, they said. Well, the stock has doubled in less than three years, the company would not think, looking back that having raised money at a higher price was a disaster, now would they? They would not monetize mobile, remember that? Well, the company reported last evening that mobile ad revenue was 69 percent of total ad revenue, fancy that!
Facebook is changing the world. There was a Deloitte report, titled Facebook's global economic impact, which "estimates that through these channels Facebook enabled 227 billion Dollars of economic impact and 4.5 million jobs globally in 2014." Of course for you, the investor or potential investor it matters that people start using advertising more aggressively. The nature of the beast is progressing, the Zuck said five years ago it was mostly text and photos. Nowadays it is photos, a little text and videos. In five years time we may get used to the idea of updating our life and uploading videos on the fly, provided the bandwidth costs are cheap.
Facebook is starting to morph into a company with different irons in the fire, Oculus is potentially an entertainment revolution, to sell that many could be a huge challenge. They, Facebook, have only owned Oculus for 10 months. Give them time. If you think the Zuck is really the man to continue to drive this business to new heights, it will continue to attract users, this business is ONLY 11 years old next week, 4 February. Mark Zuckerberg is young, exceptionally talented and a visionary. Like Facebook, stronger cashflows in the future, they have the potential to change the future. We continue to buy.
I need your help again sports lovers. This is a cry for help from the readers of our daily newsletter. In order to secure a semi final spot in Share Shootout, I need your votes. It is very simple, if you have a Twitter account, follow the link (via the image below) and then click on the retweet button. If you do not know what a retweet button looks like, then here it is -> 
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Things we are reading, we think that you should read them too
New industries shake up the old and 3D printing will be the same - Technology and Finance: Drivers of a Profit Margin Explosion. The numbers here are all estimates and forecasts so lets see how accurate it is when we get to 2018.
From one disrupting technology to another, Uber is in South Africa and is causing waves already - Uber targets 'revolutionising' SA transport. Their forecast is that they will create 15000 jobs in the coming years and make transportation cheaper and easier. I can't say that I agree with the City of Cape Towns response to Uber.
Would you give your money to Keynes? Given the volatility of his returns most people wouldn't or even worse they would have pulled their money just before his purple patch - Would Keynes Have Been Fired as a Money Manager Today?. The tricky thing here is the question; are the low returns temporary or is my fund manager just weak?
Home again, home again, jiggety-jog. Markets are lower here to start with, fairly mixed across the board however. Food producers up, retailers up, we will see what the SARB says later, with regards to rates. I suspect a let us watch it for the time being, if inflation falls heavily towards the bottom end of the range, then we are likely to drop rates, for now, we are on hold.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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