Facebook is unquestionably a huge success story. However, at this valuation- nearly $400 billion in market capitalization- Facebook is not a prudent investment. Daily active user growth was solid- at 17% y/y- but off of that huge base, growth will be hard to come by. Moreover, their most profitable markets, such as North America, appear to be near full saturation. The majority of Facebook's revenue comes from ad dollars, and with slowing user growth, that does not bode well for FB's future. $2.3 billion in quarterly net income does not justify a $400 billion market valuation, especially when considering Facebook's growth headwinds.
Amazon has added a number of new benefits to its "prime membership" in the past few years. The cost is $99 per year and with features such as prime books, free 2 day shipping, video access, among others, that amount seems quite paltry. Amazon is prudently investing in growing its prime membership numbers. Not only do they receive recurring revenue of $99 per member, but prime members have also been shown to purchase much more heavily from the website and take advantage of the free two day shipping. This bodes very well for its overall sales growth and is part of the reason sales were able to grow 29% Q/Q. Additionally, with add on packages such as music streaming, which was recently launched, Amazon has another avenue to extract more value from Prime members and further accelerate revenue growth, even on top of this tremendous figure.
Twitter is trying to grow its live streaming platform, which it hopes to grow to be a competitive advantage & differentiate itself from other social media platforms. However, Twitter faces two major obstacles in this endeavor. First, Facebook is already pivoting towards this avenue and has the size to quickly beat out Twitter and own the "live" social media movement. Secondly, Twitter is paying to get much of the live-streaming video, such as with the Thursday Night Football games. The days of free, organic content are fleeting, which means Twitter's margins will be depressed in this area. It will have to sell enough ads to cover the cost of the content. Moreover, these ads will likely disrupt a user's experience--preventing Twitter's platform from growing. Twitter is at an inflection point and appears to have a dim future.
Amazon is creating a number of services which are huge value adders to a prime subscription. The original content that they've been creating is compelling and has been receiving many awards. When you couple access to that content with free two day shipping, Amazon Music access, as well as the litany of other benefits, an Amazon Prime Subscription is compelling. With more subscribers paying the $100 annual fee, Amazon's bottom line will grow from that fee as well as from the added sales that accompany a prime subscription. Amazon is truly an innovative company with a bright future.
Facebook had an incredible quarter. Not only is revenue growing at a breakneck pace, but it is becoming more profitable, as evidence by its operating margin increasing from 31% to 43% Y/Y. With user growth remaining strong, Facebook is starting to become a monopoly within the social advertising space.
With stagnant user growth and advertisers falling out of favor with Twitter, it faces a rocky future. The combination of more competition for social advertising budgets coupled with an audience that isn't growing at a comparable rate to competitors (i.e. Facebook & Snapchat), Twitter is set to see further revenue and profitability declines. It seems like a pipe dream that Twitter will be able to jump-start user growth, which is why I will avoid an investment in this company.
NFLX faces competition from a number of new market entrants. Increased competition provides a two-fold negative impact on NFLX. First, consumers have more options which puts pressure on its pricing. Second, there is more competition for content- providing a corresponding increase in content acquisition cost. NFLX finds itself being squeezed from both sides and this position will likely lead to more disappointing earnings releases moving forward.
I have been a huge proponent of facebook, and was a shareholder from right after the share lockup period (6 months after the IPO), until around $95 per share. I believe in Facebook's business model and applaud management for numerous prudent iterations over the years. However, the valuation is getting overly enthusiastic at this point. With over 1.09 billion daily active users, which includes the most profitable markets, growth will be harder to come by. $1.5 billion in quarterly GAAP Net Income is far too low to justify a valuation of over $300 billion. Facebook is a great company, but at this valuation, I suggest staying away.
This line of the 8-K is imperative to understand the real results in the quarter. Although on a GAAP basis, revenue did decline, the decline was merely a function of recognizing a larger income tax expense due to a changing mix of revenues. This is an adjustment and ,as such, does not impact the operational outlook of the company. In fact, on a constant currency basis, revenue in Productivity and Business Processes, Intelligent cloud, and Personal Computing, grew 6%, 8%, and 3% respectively. MSFT has focused on key growth areas and has been prudently investing in the right industry segments. Don't let the tax alteration, obfuscate the positive results that MSFT reported.
Seeing such a precipitous decline in search revenue is jarring. With that segment representing the lions' share of YHOO's revenue, this development will be quite negative with respect to the possibility of getting several bids for the company. Coupled with the revenue decline, the cost of revenue increasing 44% is a troubling development. Yahoo is getting squeezed from a revenue and cost perspective, which can lead to significant losses.
In the past, international expansion was portrayed as a huge growth avenue by management. With the US market already saturated and more competition entering the arena, this is surely a sign for concern. With cultures being diverse and desiring many disparate types of content, it will be tough for NFLX to compete with smaller, local competitors. Next quarter's forecast is an indicator of this problem, and there does not appear to be a simple fix for this problem. Acquisitions of local competitors will be costly and will either drain cash reserves or dilute existing shareholders and will make the company much harder to manage. It is clear the future is not as bright as management had once prognosticated.
Twitter is finally realizing its competitive advantage- live interactions- and is smartly capitalizing on it. Twitter is giving marketers the ability to interact with customers in certain venues such as the example they gave at the Super Bowl. This is powerful for companies, as they can quickly adapt their strategies and engage consumers in novel venues. With a competitive advantage, giving significant value to marketers, Twitter can enjoy pricing power and will improve margins from these levels. Look for expanding margins as it continues to capitalize on focusing on allowing marketers to reach and interact with consumers in new ways.
Amazon has taken a unique strategy to improving profitability. They are trying to emulate Costco's business model- low margins with a membership fee. With Prime memberships growing steadily in 2015, it appears that this strategy is becoming successful. Amazon is prudently growing this avenue by focusing on creating compelling content that will lure and retain prime members. With increasing Prime members being paramount to Amazon's success, this is certainly a figure to watch moving forward.
Facebook is currently firing on all cylinders. User growth has remained steady and it certainly has developed a competitive advantage in the form of its network effect and unique targeting capabilities for advertisers. This competitive advantage has allowed it to increase the price of its ads, which has had a beneficial impact on operating margin- 44% in Q4 of 2015 v. 29% in Q4 of 2014. This positive pricing trend further led to net income & EPS over doubling in the same period. Facebook's business fundamentals are strong, but a lofty valuation may prove to mute returns for FB investors; with a market capitalization already north of $260 billion, investors should be cautious about being long FB at this level.
It is evident that NFLX's success is tethered to creating compelling, exclusive content- even management concedes this fact with its explanation that Narcos and Marvel's Jessica Jones helped them grow their membership figures higher than expected. This tethering is a risk since if they can't create this compelling content. In that case, growth will slow, and they may lose subscribers to the increasingly competitive industry. Launching in foreign countries, where they have no competitive advantage in creating content that appeases the tastes of those consumers is risky as well. Currently these losses are evidence of this fact.