Review Of Facebook & Microsoft’s Earnings Reports

Facebook’s Earnings Beat, But The Firm Shows Cracks

After the bell on Wednesday, two of the most important firms in the market reported earnings. I’ll review both in this post. First, let’s look at Facebook. The overall numbers were good, but I see cracks in the business which might be reflected in the stock in the next 1-2 years. The stock sold off after hours initially after the report, but then rebounded after the earnings call. On Thursday, it closed up 3.3%.

Facebook’s EPS was $2.21 which beat expectations for $1.95. Revenues were $12.97 billion which beat estimates for $12.55 billion. As you can see in the chart below, Facebook’s revenue growth was 47%. It was another great revenue growth quarter. Facebook has put out spectacular numbers every quarter besides the 2nd and 3rd quarter as a public company. The firm stumbled out of the gate and then became a consistent winner.

I think Facebook stock was helped by the fact that it hasn’t been up as much as the other FANG stocks in the past 3 months (it was up 4.45%). Microsoft sold off after its report as it ran up heavily before earnings. I think the Facebook earnings report shows the company is losing momentum. That will eventually show up in the top and bottom line if it’s not fixed soon. The total daily active users on Facebook was 1.4 billion which missed expectations for 1.41 billion. As you can see from the chart below, the company only added 32 million daily active users which was the smallest increase since Q4 2015. The most concerning aspect of that metric is that Canada and the U.S. lost 1 million users which was the first decline ever. This is terrible news because those are the most valuable users to advertise to. Average revenue per user was $6.18 which beat estimates for $5.90. The scary part for Facebook is it is reaching peak ad load at the same time it is struggling to add new users.

The worst part about the quarter was Facebook said total usage on its network fell 50 million hours per day. This is a 5% decline which translates to about 2 minutes per person. Mark Zuckerberg tried to spin that into good news by saying that the company is making users less addicted, focusing on users building more meaningful relationships, and limiting viral videos. This is spin; the company is facing a major problem. The amount of original posts is declining causing Facebook to rely on low quality content like viral videos to get users to spend time on the platform. Viral videos are low quality content because any website can host them. Original content makes users keep coming back. The new strategy is great because original content is more sustainable. The short term decline in usage was spun by saying the company cares about the social media addiction issue. The company needs this strategy to pay off because news feeds in North America have become stale.

Another issue Facebook faces is operating leverage. The company is hiring more people to monitor the site to stop explicit content from getting popular. The company is also working to stop misleading ads such as those advertising cryptocurrency businesses. Facebook is going from a hands-off business which has huge margins, to one that is tightly controlled and has more humans working for it. The firm’s staff increased 47% in 2017. The company also has a pledge to double its 10,000 safety and security staff. The fact that Facebook is monitoring content more strictly makes people less interested in posting.

Instagram has become the focus for investors because Facebook hasn’t been able to reach young people like Snapchat and Instagram. Instagram has 800 million monthly active users. The story for a couple years has been that Instagram has the opportunity to monetize users better. That appears to have been done in the past year. According to a social advertising company, the firms’ clients delivered 17 times more ad impressions in 2017 compared to 2016. Obviously, successfully increasing the ad load is great, but it can lead to slowing user growth. Also, it means that catalyst has occurred, making investors look for the next big thing that can keep growth at this torrid pace.

Microsoft Beats Expectations

As I mentioned, Microsoft stock sold off on Thursday after beating estimates on Wednesday after the close. It was probably down 0.79% because it was up 13.04% in the previous 3 months. The quarter was great as the EPS beat expectations by 10 cents as they came in at 96 cents. Revenues of $28.92 billion best estimates for $28.40 billion. That was 12% growth over last year. The chart below breaks down the firm’s 3 revenue segments. As you can see, More Personal Computing revenue which includes Windows devices, gaming, and search was up 2%. Its $12.17 billion in revenue beat estimates by $150 million. Productivity and Business Processes revenue was $8.95 billion which was up 25% which beat estimates by $90 million. This unit includes Office and LinkedIn. Finally, the Intelligent Cloud business had revenues of $7.8 billion which were up 15% which beat estimates by $290 million. This unit includes Azure, Windows Server, and SQL Server.

The table below breaks down each business line. As you can see, gaming revenue was up 8%; this includes the release of the Xbox One X console. The Azure cloud service remains the company’s star as it takes share from other firms. This 98% growth rate is near double Amazon Web Services’ growth of 45%.

Conclusion

The solid earnings from the tech names is helping the stock market combat its biggest foe in a few years, rising interest rates. As we’ve discussed, when the 10 year bond yield gets to 3.5%, it will be a negative for stocks. With the 10 year hitting 2.7896%, it looks like that effect is coming early as it has kept a lid on stocks in the past few days. If Netflix, Microsoft, and Facebook stocks all do well in the next 3 months, that goes a long way in helping the Nasdaq stay in its uptrend.

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