Saturday, July 27, 2013

WE WERE WRONG (Barron's) "Facebook mobile-ad spend crushes our short thesis"

Barron's: A Return Visit To Earlier Stories: What's Next
For Facebook
By Andrew Bary

      (FROM BARRON'S 7/29/13)
      Facebook dealt a big blow to its doubters -- including Barron's -- last
week when it reported its best quarterly results since going public in May 2012.
The company's second-quarter revenue and profit handily topped Wall Street
estimates, prompting a surge of eight points, or 30%, in its share price to
      Facebook's headline earnings of 19 cents a share excluding stock-based
compensation topped the consensus of 14 cents and were up 58% from 12 cents
in the year-earlier period. Revenue gained 53% to $1.8 billion, and mobile-
advertising revenues, the company's focus in recent quarters, totaled $656
million, about $200 million above estimates.
      "We were wrong, Facebook mobile-ad spend crushes our short thesis,"

headlined a note from BTIG analyst Richard Greenfield, who upgraded Facebook to
Neutral from Sell. Our view had been similar to Greenfield's, namely that a
fragmenting audience for social media would undermine Facebook and that it would
alienate mobile users with a barrage of spam-like ads.
      While there ultimately may be merit in our arguments, Facebook's hold on
its audience is still strong as users shift to mobile and advertisers have been
won over by the company's massive user base of over one billion and its
ad-targeting capabilities.
      Barron's has been bearish on Facebook since before its IPO. We initially
looked good when Facebook tumbled after the IPO, but our cover story last fall
("Still Too Pricey," Sept. 24, 2012) was a bad call because we argued that
Facebook was worth only $15 a share. In a follow-up story on Feb. 4, we
conceded defeat on $15 but said the stock probably is worth no more than
$25. The stock went public at $38 a share.
      Several Wall Street analysts boosted their price targets to over $40 a
share. The new consensus for 2013 non-GAAP profit is 70 cents a share, up from
57 cents, and 92 cents for 2014, up from 76 cents.
      Even with those profit-estimate boosts, Facebook shares look fully priced
at $ 34. The non-GAAP estimates favored by the Street exclude about 25 cents
of expenses related to Facebook's stock-based compensation, driven by generous
grants of restricted stock to employees. Add back this very real expense, and
Facebook trades for 50 times next year's projected profits of 67 cents a share
- - a full valuation for a company that still has some proving to do.

Barron's: Tech Trader: What The Street Missed In Apple's Earnings
By Tiernan Ray

      (FROM BARRON'S 7/29/13)
      In business, as in life, there are things you can try to control, and
things you can't control at all. Apple's third quarter fiscal report on Tuesday
demonstrated the dichotomy.
      Apple (ticker: AAPL) delivered better revenue and profit than expected,
which was nice, albeit a consequence of vastly reduced expectations: Estimates
for revenue and profit had declined 21% and 36%, respectively, in the last six
months. The stock rose by 5% the next day and ended the week up 4% at $440.99.
      Apple sold 31.2 million smartphones in the quarter, up 20% year over year,
and more than Wall Street had projected. Also very nice. But the average price
declined 4% from the prior-year quarter, and fell from the fiscal second-quarter
level, as many buyers sought out the cheaper iPhone 4 and 4S, versus the more
expensive iPhone 5.
      Apple can't control the fact the incremental buyer for smartphones wants
something less expensive, so the company did its best to make less-expensive
units widely available at "affordable" prices.
      Apple sold fewer iPads than expected, 14.6 million versus expectations of
about 17 million. That was in part because the company didn't refresh the iPad
this spring as it had a year earlier with a high-resolution model, according to
CEO Tim Cook.
      That was clearly a case of Apple just failing to come up with the goods
necessary to spur another upgrade wave that would ensure the kind of cadence
that Wall Street desires.
      One could say Apple hasn't done enough to create the high-value product
that would sell at the top end of the price scale, though that's debatable, at
least in the case of the iPhone. The iPhone 5 was still the top seller among the
three, even given the cheaper units' strong showing.
      We've heard reports for the last month or so, moreover, that Samsung
Electronics' (005930.Korea) more expensive model, the Galaxy S4, has shown lower
shipment numbers than some analysts predicted when it debuted in March. And so
even Apple's powerful rival cannot completely control either unruly expectations
or changing buying patterns, or both. Samsung has said sales of the S4 last
quarter were "solid." (Whatever that means.)
      Data from research firms Strategy Analytics and IDC suggest both Apple and
Samsung are contending with a shifting smartphone landscape. The second-quarter
smartphone data showed that virtually all the smaller players had notable
appreciation in smartphone market share. LG Electronics and Chinese players
Lenovo, ZTE, and Huawei all noted superior market-share percentage gains. It
remains to be seen if Apple and Samsung are both facing a "Buy Chinese"
mentality in the world's largest, and one of the fastest-growing, smartphone
      Data are not yet available on second-quarter pricing, but Strategy
Analytics's Neil Mawston notes that in the first quarter prices on average fell
12%, adding "the smartphone mix globally is tilting from postpaid to prepaid,
and from developed to emerging markets, and those two trends are slanting the
industry's average smartphone price down rather than up."
      An especially dour report from Citigroup's Glen Yeung on Thursday
suggested in fact that there is nothing Apple can control. The market for
smartphones will be completely saturated by next year in the U.S. and other
developed markets, he opines. There are 1.4 smartphones in use for every adult
person who would buy a phone. So there just aren't enough new buyers.
      Something similar will be the case in developing economies by 2016, he
reckons. Nor does he think there's much Apple can do to goose the market. Having
swallowed the camera, the GPS device, the MP3 player, the portable media player,
the digital picture frame, and other once discrete gadgets, there just isn't a
lot of utility for Apple or Samsung to conquer and incorporate into their wares.
      One thing was missing in Yeung's grim assessment -- the same thing many
miss because they are focusing on Apple's hardware units. Apple controls a
platform, one of the two dominant platforms in mobile computing, its iOS
software, which is an effective duopoly with Google's Android. In the category
of software and services, Apple sold $3.99 billion last quarter, which was up
25% from the year- earlier quarter. That was slower than the 37% growth recorded
last year, but still impressive for a business running at $16 billion
      Why is that important? Again and again, mobile market stats, and anecdotal
evidence show that people want these devices increasingly for the applications
and services they can consume with them. The same data suggest Apple's customers
are willing to pay up for those apps and content and services somewhat more than
users of Android.
      Being at the center of an ecosystem that makes money for app developers
and advertisers and publishers is a position of control that Apple maintains
that is still valuable even if the mobile device market is rather out of control
right now.

Barron's: Review & Preview -2-
Jul 27 at 00:10
   Now Morrow, who studied vibrations in mechanical structures for patterns
that would portend structural failure, is detecting a decidedly sour vibe from
the Standard & Poor's 500 stock index, using daily closing prices. "A bear
market is imminent, within days," says Morrow, who sells his research to a small
cadre of institutional clients through Robert Morrow Institutional Advisory, in
Bradenton, Fla. A 20% drop, a common definition of a bear market, would cut the
S&P by 338 points, leaving it well below its recent 1690, at 1352.
      Stocks have been on a tear since 2009, and the consensus thinks the rally
will continue at least until the year end. But Morrow begs to differ. Earlier
this year he argued the S&P would suffer six corrections, with the first
occurring on June 20, with a drop to 1598. The S&P closed at 1588 that day. Five
to go. The next correction, he maintains, will be to 1542. Not so groovy.
      -- Christopher C. Williams
      Week's Highlight
      Wednesday 31: The Fed is likely to try to jawbone short-term interest
rates lower by focusing on fiscal concerns and low inflation.
      Monday 29
      -- Deadline for Time Warner Cable and CBS to reach agreement on
retransmission fees before CBS programs are blacked out on the cable carrier.
      -- Palestinian president visits Egypt.
      Tuesday 30
      -- NYSE Euronext posts second-quarter results before the market opens.
      -- Look for the S&P/Case Shiller 20-city index to rise 13.3% year over
year in May, says ITG Investment Research's chief economist, Steve Blitz.
      -- A Senate Budget panel looks at health-care costs.
      -- Israeli prime minister holds peace talks with the Palestinians.
      -- Golden Networking hosts high-frequency-trading forum in New York.
      -- Former Italian Prime Minister Silvio Berlusconi's final appeal is
      Wednesday 31
      -- The Fed statement will try to "verbally cajole the market" to lower
short- term interest rates by focusing on fiscal risks to the economy and
concerns about low inflation, says Blitz.
      -- Advance second-quarter GDP will be tough to parse, given a data
restatement. Blitz sees 0.8% growth.
      -- Honda Motor posts quarterly results.
      -- Housing economist Karl Case speaks about moderating housing cycles.
      -- Russia's Vladimir Putin is in Tehran to talk about Iran's nuclear
      -- Capital Southwest splits, 4-for-1.
      -- American Homes 4 Rent is set to price 44.12 million shares at $16 to
      -- Ardmore Shipping prices 10 million shares at $15 to $17 apiece.
      -- An FDA advisory panel takes up Sanofi-Aventis nasal-spray data to
switch it to over the counter.
      Thursday 1
      -- Auto sales should edge down in July to a seasonally adjusted annual
pace of 15.8 million units, says Blitz.
      -- The ECB is expected to stand pat on interest rates. The Bank of
England's forward guidance may surprise some market watchers for its dovishness.
      -- Challenger Gray & Christmas issues July report on job-cut
      -- Exxon Mobil and Kraft post results.
      -- Athlon Energy is set to price 15.79 million shares at $18 to $20
each; Sprouts Farmers Markets, 18.5 million shares at $14 to $16 each.
      -- Mylan hosts an investor day.
      -- Portfolio Recovery splits, 3-for-1.
      Friday 2
      -- July nonfarm payrolls should come in at about 190,000, fairly flat with
the previous month, says Blitz.
      -- Dell's twice-postponed vote on a buyout plan from its founder is
      -- Audi gives a first-half update.
      -- Detroit seeks to appoint a panel to protect retirees in its
      -- St. Louis Fed's James Bullard speaks about the U.S. economy at
      -- Toyota Motor posts results.
                            Coming Earnings
 Day                    Quarter  Consensus   Year   Ticker
                                  Estimate    Ago
Simon Property Grp        2Q       $2.07    $1.89    SPG
Franklin Resources        3Q        2.53     0.71    BEN
Express Scripts Hldg      2Q        1.10     0.88    ESRX
Anadarko Petroleum        2Q        0.91     0.85    APC
Occidental Petro          2Q        1.60     1.64    OXY
Aflac                     2Q        1.51     1.61    AFL
Merck                     2Q        0.82     1.05    MRK
Amgen                     2Q        1.74     1.83    AMGN
Pfizer                    2Q        0.56     0.62    PFE
NextEra Energy            2Q        1.29     1.26    NEE
Ecolab                    2Q        0.84     0.72    ECL
Nat'l Oilwell Varco       2Q        1.33     1.46    NOV
Amer Tower                2Q        0.52     0.12    AMT
Phillips 66               2Q        1.83     2.23    PSX
MasterCard                2Q        6.30     5.65    MA
Exelon                    2Q        0.55     0.61    EXC
Southern Co               2Q        0.68     0.69    SO
CBS                       2Q        0.72     0.65    CBS
Allergan                  2Q        1.20     1.07    AGN
MetLife                   2Q        1.33     1.33    MET
Comcast 'A'               2Q        0.63     0.50    CMCSA
Amer Int'l Grp            2Q        0.86     1.06    AIG
ConocoPhillips            2Q        1.29     1.22    COP
Apache                    2Q        2.02     2.07    APA
The DIRECTV Grp           2Q        1.33     1.09    DTV
Automatic Data Proc       4Q        0.57     0.52    ADP
Kraft Foods               2Q        0.66             KRFT
Covidien                  3Q        0.89     1.07    COV
Time Warner Cable         2Q        1.65     1.43    TWC
Public Storage            2Q        1.77     1.38    PSA
Procter  &  Gamble        4Q        0.77     0.82    PG
Exxon Mobil               2Q        1.90     1.80    XOM
Viacom Cl B (New)         3Q        1.30     0.97    VIAB
Eaton                     2Q        1.11     1.15    ETN
Chevron                   2Q        2.98     3.56    CVX
(Earnings are diluted and report dates are tentative. All forecasts and
historical numbers exclude extraordinary items by accounting definitions.)
Source: Thomson First Call
                   Consensus Estimate
Day   Time
                                                 Consesus Est  Last Period
T   10:00   July Consumer Confidence               81.0         81.4
W    8:30   Q2 GDP (p)                              1.0%         1.8%
     9:45   July Chicago PMI                       53.0         51.6
Th  10:00   June Construction Spending              0.3%         0.5%
    10:00   July ISM Manufacturing                 51.5         50.9
F    8:30   July Nonfarm Payrolls                 183,000      195,000
     8:30   July Unemployment Rate                  7.5%         7.6%
     8:30   June Personal Income                    0.4%         0.5%
     8:30   June Consumption                        0.5%         0.3%
    10:00   June Factory Orders                     2.4%         2.1%

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