Tech Round-up: Facebook Steals the Headlines Again

“We remain convinced that further growth in Instagram, IGTV, and Stories users will continue to attract advertisers to Facebook’s platform,” said Morningstar analyst Ali Mogharabi after the results. Facebook’s fair value estimate was raised to $190. But Morningstar notes that the company continues to face the risk of regulatory intervention as governments look to restrict the use of public data by social media firms.

Facebook is at least taking this risk seriously, in hiring former Deputy Prime Minister, Sir Nick Clegg, as head of communications. His appointment raised eyebrows in the UK media, especially given Sir Nick’s chequered political history. With news this week linking social media to mental health problems among young people, this is a live issue that is unlikely to go away in 2019 – however impressive Facebook’s next quarterly numbers are.

The $1 trillion valuations for Apple (AAPL) and Amazon (AMZN) reached last year seem a way off, but both companies have at least moved back above $800 billion.

Results from Apple had already been teed up and foreshadowed by its revenue warning of January 2.

Morningstar analysts maintained their fair value estimate of $200 for Apple, anticipating that the firm resumes mid-single-digit sales growth from the financial year 2020 onwards following a modestly lower 2019 financial year.

It was a mixed quarterly performance for Apple products – iPhone sales fell 15% year on year, which CEO Tim Cook ascribed to a stronger dollar deterring emerging market buyers. But “non-iPhone” sales, which include the Apple Watch, were up 19%. Apple’s share price lost $15 to $142 on the shock announcement in early January, but have since recovered to around $175.

Apple is no longer breaking out sales of iPhone models. And there is some support in these results for the view that iPhone sales have reached a tipping point. The current strategy of charging more for enhanced versions of Apple’s flagship product could be running out of steam.

Amazon Comes Back to Earth

Amazon shares fell 5% on the day after earnings were released despite record-breaking holiday sales fuelling a $3 billion quarterly profit. Earnings per share of $6.04 and revenue of $72.4 billion were also records, and compare favourably with the 2017 holiday quarter, which saw EPS of $3.75 and revenue of $60.5 billion. Rising spending linked to the new headquarters and slowing growth in the current quarter took the shine off Amazon’s shares. 

As Morningstar analyst R.J.Hottovy explains, the negative share price reaction is due to the market readjusting its previously sky-high expectations for the stock – first quarter 2019 revenue is expected to grow between 10-18%, against 20% this quarter.

“While we acknowledge that there are legitimate questions about international markets such as India, we believe the more relevant takeaway for investors is that Amazon's 2018 moves make it a more dynamic company with greater monetisation opportunities over a longer horizon,” Hottovy says.

“We're not planning changes to our $2,200 fair value estimate. We expect some volatility over the near future as the market adapts to Amazon's growth/profitability algorithm but ultimately believe the cash flow potential of its evolving business model is too much for investors to pass up,” he adds.

Google parent company Alphabet (GOOGL) was the last of the FAANG stocks to report and beat profit and revenue forecasts.  Revenue at nearly $40 billion was 22% higher year on year, helped by a 20%  rise in advertising revenue as mobile search and YouTube continue to grow. The growth in advertising did lead to a rise in costs, especially “traffic acquisition costs”, which Google pays companies to be a default search engine. The rise in advertising costs knocked shares in after-hours trading but they recovered their poised in Tuesday trading with a gain of less than 1% to $1,151.

Morningstar analyst Ali Mogharabi said: “We did not make significant changes to our projections and continue to value Alphabet at $1,300 per share. While the share price of this wide-moat name has increased over 9% year-to-date, the stock remains attractive at current levels.”

“While we continue to expect deceleration in ad revenue growth, we remain confident that search and YouTube ad sales, plus further growth in cloud and Google’s hardware offerings will drive total top-line growth at a 17% compound annual growth rate to the end of 2023.

Netflix Outperforms

Netflix (NFLX), the smallest of the FAANGs, was the first to report and in many ways its high-growth story remains in better shape than its bigger rivals. Its share price has been on a tear since the start of the year, rising from $267 to $355 – the record high for the stock was posted last summer above $400.

Still, Morningstar assigns a one-star rating to the stock, meaning it is significantly overvalued. Faster international customer growth triggered a rise in the stock’s fair value estimate from $120 to $135, but this is still more than $200 below its current share price.

The market reacted favourably to news before the earnings that Netflix is raising its prices, on the grounds that a company is confident enough to push this through. Analyst Neil Macker argues that this price increase could slow the addition of US customer numbers this year.

“We also expect that the firm will face stronger competition in the U.S. and internationally, necessitating continuing increases in content and marketing spending which will result in continued cash burn and limited margin expansion over the next three years,” Macker says.”

“In short, we don’t believe Netflix’s current share price considers the potential changes to consumer behavior that a combination of higher prices and increased competition could create, to the detriment of Netflix’s business.”