Latepost Reacting To Profits Reports: Let's Become Real!

In my terminal 2 posts, I considered how earnings reports tin generate narrative shifts or changes, thus affecting value, as well as pricing effects, when companies trail or compaction investors’ estimates on metrics (earnings per share, revenues, user numbers etc.). In this one, I intend to apply the lessons inwards those posts to 3 companies that I remove hold been working alongside over the terminal distich of years: Apple, Facebook as well as Twitter. In particular, I would similar to aspect at the most recent earnings written report for each company, the intelligence each written report contained, the distractions inwards each 1 as well as the outcome on stock prices. I would too similar to aspect at the data inwards past times earnings reports for each company, over the entire (limited) histories for Facebook as well as Twitter’s, as well as the terminal 2 years of reports for Apple, alongside the intent of incorporating what I remove hold learned into updating my narrative for each company.

Apple Earnings Reports: The Meh Chronicles

I looked at Apple inwards particular a few months ago, chronicling my estimates of value for the fellowship as well as stock cost movements starting inwards 2011 as well as going through Apr 2014. The graph below reproduces my findings (with prices as well as values per part adjusted for the recent 7 to 1 stock split), alongside an update through August 2014:

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Apple: Price versus Value (My Estimates)

Note that acre stock prices remove hold ranged from $45 to unopen to $100 over this period, my value estimates remove hold had a much tighter range, reflecting my largely unchanged storey line for the company, over the period. Starting inwards 2011, my narrative for Apple has been that it is a mature company, alongside express growth potential (revenue growth rates< 5%) as well as sustained profitability, albeit alongside downward push clit per unit of measurement area on margins, equally its pith businesses becomes to a greater extent than competitive. I allowed for alone a pocket-size probability that the fellowship would innovate some other disruptive production to follow upwards its trifecta from the prior decade (the iPod, the iPhone as well as the iPad), partly because of its large marketplace cap as well as partly because I idea it had used upwards its disruption karma over recent years.

Looking at the earnings reports from the fellowship over the terminal nine quarters, it is remarkable how footling that narrative has changed. In the kickoff 2 sets of columns, I written report on Apple’s revenues as well as earnings per part as well as contrast the actual numbers alongside the consensus guess for these numbers inwards each quarter. For much of the fourth dimension period, Apple has matched or beaten revenue as well as earnings estimates, albeit past times pocket-size amounts, but the marketplace has been unimpressed, alongside stock prices downwardly on half dozen of the nine post-report days as well as 7 of the nine post-report weeks.

Apple: Earnings Reports from July 2012 to July 2014

Note that afterward controlling for the quarterly variations, revenues remove hold been apartment or remove hold had alone mild growth as well as operating margins remove hold been on a mild downward trend. With Apple, the other focus inwards the earnings reports has been on how arter-2007/">iPhone as well as iPad sales are doing as well as the tabular array below reports on the unit of measurement sales that Apple reported each quarter, alongside the growth rates over the same quarter’s sales inwards the prior year. In the terminal 2 columns, I written report Apple’s global marketplace part inwards the artphone-os-shipments/">smartphone as well as tablet markets, past times quarter.

Apple: Unit Sales for iPhone & iPad, alongside global marketplace share

While the marketplace fixation alongside Apple’s iPhone as well as iPad sales may go disconcerting to some, it makes sense for 2 reasons. First, it reflects the fact that Apple derives most of its revenues from smartphones/tablets as well as that the growth inwards unit of measurement sales as well as alter inwards marketplace part hence becomes a proxy for futurity revenue growth. Second, Apple’s earnings are beingness sustained past times its impressive turn a profit margins inwards the smartphone as well as tabular array businesses as well as looking at how good it is doing inwards these markets becomes a stand-in for how sustainable the company’s margins (and earnings) volition go inwards the future. Each quarter, in that location are rumors of some other Apple disruption inwards the works, but each fourth dimension the promises of an iWatch or an iTV don’t pan out, investor expectations that Apple volition draw some other rabbit out of its lid remove hold eased.

The most recent earnings written report seems to reverberate this current of stability, temporary though it may be, for Apple, where investor expectations remove hold moderated as well as the fellowship is beingness measured for what it actually is: an extraordinarily profitable company, alongside the most valuable franchise inwards the world. It seems to remove hold stabilized its seat inwards the smart telephone world, is seeing its tablet marketplace shrink as well as its personal figurer line of piece of occupation organisation is beingness treated equally a rump business. In effect, analysts are treating it equally a mature fellowship that is beingness powered past times the iPhone money machine, where margins are declining alone gradually. Since that is the narrative that I remove hold using all along inwards my valuations, I come across footling alter inwards my assessment of intrinsic value for Apple. Allowing for the stock split, the value per part that I assess for the company, alongside the data inwards the novel earnings written report incorporated into my estimates, is $96.55, almost unchanged from my guess of $96.43 inwards Apr 2014. With the novel iPhone 6 launch simply a few months away, I am certain that the distractions volition start anew, as well as I recollect it is prudent for me equally an investor to map out an go out plan, if the stock cost rises to $100 or higher. If it does not, I volition happily proceed to concord Apple, collect my dividends, as well as hope for a disruption downwardly the road.

Facebook: Bigger than Google?

I valued Facebook simply earlier its IPO inwards this post, as well as argued that the stock was beingness over priced at $38 for the offering. The tepid answer to the offering cost made me aspect right, but for all the incorrect reasons. The botched IPO was non because the stock was over priced or because the marketplace attached a lower value to the stock but largely due to the hubris of Facebook’s investment bankers who seemed to non alone recollect that the stock would sell itself but actively worked against setting a narrative for the company. My initial valuation, though it volition aspect conservative inwards hindsight, was based upon the belief that Facebook would go equally successful equally Google inwards its growth inwards the online advertising business, acre maintaining its sky-high turn a profit margins.

Looking at Facebook’s earnings reports since its IPO, in that location remove hold been nine reports as well as the marketplace reaction has shifted significantly over the period.

Facebook: Earnings Reports & Price Reaction

I recollect that the botched world offering colored the marketplace answer to the really kickoff earnings report, alongside the stock downwardly almost 25%. In fact, I revalued Facebook afterward this report, when the stock cost plunged below $20, as well as wrote this post, controversy that in that location was zero inwards the written report that changed the narrative as well as that the fellowship looked nether valued to me. I was lucky plenty to select handgrip of it at its depression point, since the fellowship turned the corner alongside the marketplace past times the side past times side quarter as well as the stock cost to a greater extent than than doubled over the next year. I revisited the valuation afterward the August 2013 earnings report, as well as chose non to alter my narrative, leaving me alongside the conclusion that the stock was fully priced at $45 as well as that it was prudent to sell. Looking at the earnings numbers over the nine quarters, it is clear that has Facebook has mastered the analyst expectations game, delivering better-than-expected numbers for both revenues as well as earnings per part for each of the terminal 7 quarters.

With Facebook, the marketplace has too paid attending to the size as well as growth of its user base of operations equally good equally the company’s success at growing its mobile revenues. In the tabular array below, I listing these numbers equally good equally Facebook’s invested upper-case missive of the alphabet each quarter (computed past times adding the mass values of debt as well as equity as well as netting out cash) as well as a mensurate of upper-case missive of the alphabet efficiency (sales equally a proportion of invested capital):

Facebook: User Numbers, Revenue Breakdown & Invested Capital

This tabular array captures the heart of the Facebook success story: a continued growth charge per unit of measurement inwards a user base of operations that is already immense, a dramatic surge inwards both online users as well as advertising as well as improving upper-case missive of the alphabet efficiency (note the increasing sales to upper-case missive of the alphabet ratio). The most recent earnings written report provided to a greater extent than of the same: continued user growth, increased revenues from mobile advertising as well as improved profitability, both relative to revenues as well as invested capital. Looking at the terminal report, I remove hold to conclude that I was wrong close Facebook’s narrative remaining unchanged, for the next reasons:

While my initial reaction to Facebook’s success on the mobile forepart was that it was what it needed to do to sustain its narrative equally a successful online advertising company, the charge per unit of measurement at which it has grown inwards the mobile marketplace has been staggering. In fact, I recollect that in that location is at nowadays a really existent possibility that Facebook volition supersede Google equally the online advertising manly mortal monarch as well as proceed to maintain its profitability. That is a narrative shift, which volition interpret into a larger marketplace part of the online advertising market, higher revenue growth as well as maybe to a greater extent than sustainable operating margins (than I had forecast).
The inexorable growth inwards the user base, astonishing given how large the base of operations already is, has too been surprising. That remains Facebook’s biggest property as well as a platform that they tin elbow grease to role to go inwards novel markets as well as sell novel products/services. Facebook has too shown a willingness to pass large amounts of money on acquiring the pieces that it needs to maintain increasing its user base of operations as well as construct on it. The downside of this strategy is that growth has been costly (though the costs are hidden for the minute inwards the financials), but the upside is that is putting inwards house the pieces it needs to monetize its user base. While the revenue breakdown does non reverberate this line of piece of occupation organisation expansion yet, I recollect that Facebook is better positioned for a narrative change at nowadays than it was a yr or 2 ago.

My updated valuation for Facebook reflects these adjustments. Incorporating a higher revenue target ($90 billion, rather than $60 billion) as well as to a greater extent than sustained margins (40% instead of 35%) , I estimate a value per part of $63 today. For those of y'all who remove hold been taking me to chore for selling at $45 inwards September 2013, I commend y'all for your foresight inwards belongings on to the stock, but I am at peace alongside determination for 2 reasons. First, given what I knew inwards September 2013, I did what I had to do, given my investment philosophy, as well as 2nd guessing it at nowadays is an practise inwards futility. Second, if the biggest regret I remove hold inwards my investing life is that I sold a stock to brand a 150% render rather than belongings on to it to brand a 300% return, I would consider myself to go genuinely blessed. I may go compounding my error here, but at $72, I don't come across it equally a bargain, as well as I am inwards no hurry to purchase the stock now. For those of y'all who are Facebook stockholders, though, this may go 1 of those companies where the value could chase the cost for years, equally the fellowship finds means to plow the possible into the plausible as well as the plausible into the possible, as well as I wishing y'all alone positive returns.

Twitter: The Early Returns

In the weeks leading upwards to the Twitter IPO, I wrestled alongside valuing the company. In the valuation that I did inwards the calendar week earlier the IPO, the narrative I offered was of a fellowship that would acquire a pregnant but non a dominant histrion inwards the online advertising business. I argued Twitter’s strength (the 140 grapheme bound on messages) would too go its weakness, as well as that businesses would go loath to brand Twitter their primary advertising platform. My targeted revenues inwards 10 years were all the same substantial, as well as inwards conjunction alongside a good for y'all turn a profit margin of 25%, yielded a value per part of $18, good below the offering cost of $26 as well as fifty-fifty farther below the opening solar daytime cost of $46.

In the months since, Twitter has had 3 earnings reports, as well as the accounting results are summarized below, alongside analyst expectations as well as the stock cost reaction to each report.

Twitter: Earnings Reports as well as Price Reactions

Twitter’s kickoff 2 earnings reports were received badly past times the market, though the fellowship compaction revenue forecasts on both, partly because the fellowship continues to lose money. The most recent earnings written report received a rapturous answer straight off afterward it came out, though some of the rapture seems to remove hold eased inwards the days after. Even to a greater extent than as well as so than Facebook, the marketplace has focused on secondary numbers at Twitter, alongside particular attending beingness paid to the growth inwards the user base. In the tabular array below, I listing these other numbers:

Twitter: The Other Numbers

The negative reaction to the 2nd earnings written report was partly due to the depression growth (relative to expectations) that Twitter reported inwards the release of users as well as the positive reaction to the terminal written report seems to go traceable to Twitter beating analyst expectations for user growth inwards the most recent quarter. Looking at both the accounting as well as user numbers, what is boom close Twitter is how footling the fellowship has changed over the current that it has been inwards the market. The proportion of revenues it receives from advertising has remained or as well as so 90%, its revenues from international sales remove hold increased alone marginally as well as its mobile advertising has stayed at a high per centum of revenues (which is non surprising given that its compact format travels good to mobile devices). Its role of invested upper-case missive of the alphabet has non acquire to a greater extent than efficient as well as acre y'all may combat that this is early on inwards the game, contrast Twitter's development alongside Facebook's over the kickoff few quarters.

There is zero that I come across (and I may go missing some cardinal component) inwards these reports that would atomic number 82 me to reassess my initial narrative, i.e., that Twitter volition go a successful, but non dominant online advertising company, as well as the terminal earnings written report alone reinforced that view. There was some skillful intelligence inwards the report, peculiarly on the revenue front, but in that location was some game playing that was needless, inwards my view. First, equally argued inwards this post, this is nonsense, but I blame the analysts as well as investors who purchase into this fiction simply equally much equally I do the companies that feed them the fiction. In fact, equally I listened inwards on the Twitter earnings call, I was left alongside the uneasy feeling that this was an earnings written report produced for equity query analysts, past times an equity query analyst, inwards terms of the numbers it emphasized. It may go pure coincidence that articles/twitter-names-noto-as-finance-chief-1404221891">Twitter acquired a novel CFO betwixt its terminal written report as well as this one, as well as that inwards add-on to beingness a banker who led their world offering, he was an equity query analyst inwards a prior incarnation, but I don't recollect so.

Incorporating everything that I remove hold learned from these reports into my valuation, I come across footling motion inwards my intrinsic value. Even allowing for a much to a greater extent than efficient role of upper-case missive of the alphabet inwards the future, Winning (losing) past times losing (winning): The Power of Expectations

Reacting to Earnings Reports: Narrative Adjustments to Value

Reacting to Earnings Reports: Pricing Metrics as well as Market Reaction

Reacting to Earnings Reports: Let's acquire real!

Valuation attachments
Apple: Valuation inwards August 2014
Facebook: Valuation inwards August 2014
Twitter: Valuation inwards August 2014