S&P 500 Has Its Best January Since 1987

S&P 500 - Another Nice Rally: This Time Led By Facebook

After the worst December since the Great Depression, the S&P 500 had its best January since 1987. 

Don’t let the year 1987 scare you. While I’m bearish on stocks, we aren’t doomed to repeat the crash of October 1987. The S&P 500 was up 0.86% on Thursday which pushed the market to a new high. It closed up 7.87% for the month.

This rally on Thursday and the 6.17% decline in the VIX helped push the CNN fear and greed index up 2 points to 60. That's in the greed category. I don’t know how anyone wouldn’t consider the market overbought even though it’s still below the record high in September. 

Facebook helped the Nasdaq increase 1.37%. The Russell 2000 was up 0.84%. The financials and the materials were the worst sectors as they fell 0.27% and 1.54%. Facebook helped the communication services sector rise 3.74%. Oddly, the utilities sector rose 2.08%.

The chart below shows the percentage of stocks in each sector that are above their 50 day moving average. As you can see, all sectors except consumer staples have most stocks above their 50 day moving average. This market’s momentum is absurd.

sectors50day CHART

S&P 500 - Facebook Destroys Estimates & Catapults Higher

Facebook reported great earnings results as the firm beat estimates on the top and bottom line. This sent its stock up 10.82% on Thursday. EPS was $2.38 which was better than the $2.19 expected by analysts. 

Furthermore, revenues were $16.91 billion which beat estimates for $16.39 billion. Both daily active users and monthly active users on the main platform met estimates, coming in at 1.52 billion and 2.32 billion. 

Average revenue per user beat estimates for $7.11, coming in at $7.37. The only negative part of the quarter was the prediction of revenue growth deceleration in Q1.

Facebook is one of the most hated companies in America. That’s why I recommended it after its last earnings report. Facebook is so hated and not trusted by followers of the stock that many people outright claimed Facebook falsified the user data because they think people left the social network over privacy concerns. 

Every single potential negative story about the company gets magnified because the media knows it will generate clicks. However, the #DeleteFacebook movement wasn’t as popular as some thought.

S&P 500 - Details Of The Quarter

As you can see from the chart below, quarter over quarter monthly active user growth accelerated to 2.2% from 1.7%. Furthermore, the ratio of daily active users to monthly active users only fell 0.2% to 65.6%. 

Revenues were up 30%. Operating margins were up 4% to 46%. The number of employees spiked 41.8% which increases the odds Facebook will take control of its platform and avoid unscrupulous behavior. R&D as a percent of revenue fell from 19.4% to 16.95%, but sales and marketing as a percent of revenue was up 0.6% to 14.6%.

greatFBq4 CHART

S&P 500 - Facebook Has Killed Snapchat

Earnings per share were up 65% year over year. This is the type of quarter we came to expect from Facebook up until the Cambridge Analytica scandal. This was a great quarter because estimates were so low, and the sentiment was as weak as it could get. 

Now we’re back with a company that destroyed its main competitor, Snapchat, by legally copying its main product which is stories. Users on Facebook, WhatsApp, and Instagram post a combined 1 billion stories per day. Instagram has 500 million daily active stories users. Of the 7 million advertisers Facebook services, 2 million use the stories feature. Facebook is legendary at monetizing features and apps. 

Facebook has destroyed Snapchat to the point where I think it’s fair to say Twitter is back to being its main competitor.

S&P 500 - Change In Reporting

Facebook announced it will change the way it reports user numbers sometime in the future. It is going to count the total users on its 3 platforms instead of singling out just the main app. 

In this quarter, Facebook’s family of apps had 2.7 billion monthly active users which is up from 2.6 billion last quarter. Some investors are comparing this to Apple not giving out the specifics of iPhone unit growth. 

This is similar in that both firms are giving out less information on their main product to drive focus on less products.

The big difference is iPhone unit sales are declining while Facebook daily active users are still increasing. The difference between the two companies is Apple needs to constantly sell people a new phone. 

S&P 500 - Facebook needs to keep users addicted to its service. 

Each upgrade to new iPhones is more incremental. On the other hand, Facebook just needs to not offend people. The biggest change to the service, which is the stories feature, is doing well.

The most important aspect of Facebook’s daily active user numbers is U.S. and Canada because they are monetized at a much higher rate than other regions. From Q3 2017 to Q4 2018, the number of daily active users has fluctuated between 184 million and 186 million. There isn’t much value if the number is stagnant. I’d rather know more about Instagram and WhatsApp.

Also, Apple wants investors to focus on Services, but the firm needs to sell devices to keep people buying services. Facebook doesn’t need people to use its main app to create an account on Instagram and WhatsApp.

A final point that makes this decision logical is Facebook is creating a message app that lets users on WhatsApp, Instagram, and Messenger communicate. 

The apps are becoming more unified, so the data should be unified. I would like Facebook to break down the numbers from WhatsApp and Instagram in more detail When Apple stopped reporting iPhone unit sales, it added data on margins. It would be a negative if Facebook didn’t give out any new data, but I don’t think that’s likely to occur.

S&P 500 - Conclusion

I think stocks are overbought especially relative to declining earnings estimates. However, with Facebook’s great earnings report, the market gained one of its leaders back. I expect Facebook to hit a new record high this year. 

The biggest risk to the stock is expenses getting out of control as the firm forecasts full year expenses growing 40% to 50% in 2019. 

Spread the love