Facebook Craters
In my article on Facebook’s earnings report, I said Facebook’s market cap loss was going to be historic if it didn’t rally sharply during Thursday’s trading session. It closed down 18.96% which means it lost about $114.5 billion in market cap in one day which is the largest loss in history. It’s remarkable to see this loss beat out the losses after the tech bubble burst and during the financial crisis. Market caps have gotten larger, but it’s still surprising since we are in a bull market. This decline is great evidence that the tech stocks aren’t in a euphoric stage like the late 1990s. To be clear, it’s obvious they aren’t in a bubble like then because they have lower earnings multiples, but it’s always important to defeat the skeptics who claim the Nasdaq is in a bubble because it surpassed the peak in 2000.
It’s also worth noting that the Nasdaq fell 1.01% and the S&P 500 only fell 0.3%. The market isn’t that heavily reliant upon the leaders like the bears claim. I think it’s important to have leaders which is why I cover the big tech names closely. However, their percentage of the overall market isn’t larger than the big names of the past. As you can see from the chart below, the top 5 stock weightings in the S&P 500 are equivalent to about the bottom 250 firms. The S&P 500 was slightly less top heavy in June 2007, but was more top heavy in March 2009. It was way more top heavy in March 2000. The tech bubble was centered around a few large names such as Cisco and Microsoft.
Bullish Case For Facebook
I don’t like Facebook enough to buy it myself, but it’s still worth reviewing the bullish arguments because it is down so much. As you can see from the chart below, the year over year growth in daily active users was above the growth in monthly active users for the first time in 4 quarters. That’s a measurement of engagement. Personally, I think monthly active user totals are useless. Only the daily active users matter. More important than that is total time spent on the platforms which aren’t reported by Facebook, but are estimated via surveys. Facebook is now valued at 24 times forward EPS, has $41 billion in cash and no debt, and can grow its earnings in the mid-teens in the next 5 years if it takes share in the digital ad category which is growing faster than the overall advertising market. Facebook only lost 0.27% of its users in Europe due to GDPR. That’s quite a small impact.
Amazon Blows Out EPS Estimates
Amazon destroyed estimates for EPS as EPS was $5.07 instead of $2.50. It’s very rare to see a large cap company double EPS estimates. It’s because analysts know Amazon has earnings power, but they don’t know when it will leverage the business model. The bears on Amazon claimed the company could never make enough profits to justify its valuation a few years ago. The firm’s retail business has been bailed out by its cloud division.
Revenues missed estimates for $53.41 billion, coming in at $52.9 billion. Amazon Web Services Revenue was $6.1 billion which beat estimates for $6 billion. Amazon’s net income had a 12 fold increase from last year as it was a record $2.5 billion. AWS had 48.9% sales growth which was faster than last quarter’s growth of 48.7%. This is a small increase, but it’s still amazing because growth should be decelerating since the business has so much scale and high competition from Alphabet and Microsoft. AWS’s profits were $1.64 billion which beat estimates for $1.47 billion. Its revenues were 11.5% of the total company and 55% of the operating income.
The “other” revenue, which is its advertising sales, was $2.2 billion which is 132% year over year growth. Amazon is a behemoth in online sales and cloud services. It is trying to take on advertising next. Even though total revenue missed estimates, growth was still 39% year over year as growth in North America was 44% and international growth was 27%. It’s rare to see a big firm have quicker North America growth than international growth.
Guidance also missed estimates as revenues are expected to be between $54 billion and $57.5 billion in Q3. That is below the street’s expectations for between $55.6 billion and $62.2 billion. Amazon has been conservative with guidance historically, so I wouldn’t worry about that. I think it will be a blow out as Prime Day was likely another success.
Whole Foods had $4.3 billion in sales and now offers savings for Prime members. The firm acquired PillPack as it has a long term goal to disrupt the healthcare sector. The firm now has 575,000 workers which is up 2% from last quarter and 51% from last year. The stock was up 3.25% after hours on this report as it wiped away the losses on the day.
Final GDP Estimates
The much anticipated Q2 GDP report will be released Friday morning. Since the results will be good, the report is particularly anticipated by the Republicans because they control the government. The estimate is for 4.2% economic growth and 2.9% real consumer spending growth. The St. Louis Fed expects 3.37% growth. The NY Fed expects 2.77% growth as of July 20th. It will update its model for the final time on Friday. Its estimate for Q3 is only 2.38%. With the great data this week, I expect that to be pushed high after Friday’s update.
The Atlanta Fed model expects 3.8% growth as it was revised sharply lower from 4.5% on Thursday. The estimate was revised down because of the durable goods report, foreign trade report, which showed a greater than expected deficit, and the private inventories reports. The CNBC rapid update expects growth to be 4.2%. The chart below shows the breakdown of the Oxford Economics prediction. It expects 4.5% GDP growth. It expects 3.7% growth excluding trade, 3.1% excluding trade and inventories, and 2.7% growth excluding trade, inventories, and government spending.
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