The big disruptive names – Facebook, Google , Apple – have been gyrating in recent days as Wall Street tries to work out whether they will disappoint in the current earnings season, with Facebook starting the ball rolling for the majors on Thursday (Australian time) followed by Google, Amazon and Microsoft (Friday), Apple (Tuesday) and Twitter the day after.
There is a lot at stake. The oil and hard commodities trade has failed, consumer staples are looking tired and US rates will rise. Meanwhile, many of the biggest disruptors are trading at multiples which suggest they are ex-growth. Case in point: Apple, with an EBIT multiple of less than 10x, is at a 30% discount to Telstra. Even Goldman Sachs has produced research showing that Google is now the same price as Disney.
In the past two trading sessions, NASDAQ fell and then rose by around 100 points, or 2%, as the market puzzled it out.
Here then is the overview. Starting with Facebook, all eyes will on how well the company has been monetizing through third party applications. For those who don’t know what this means, it’s easy. Facebook users are used to seeing advertisements around the their newsfeed. What they may not be aware of is that Facebook has a mechanism for serving advertisements into games and applications that have nothing to do with the core property. This does two things – it massively opens up the amount of advertising the company can now sell, and at the same time reduces the commercial volume on Facebook, improving the user experience. This ability is what is scaring Google (which in truth can do it too, though not nearly as well). And it may be that this is the reason Google has been underperforming of late (more on this below).
The street will also be watching very closely for further news on the hosting that Facebook is now talking to publishers about. This is hugely disruptive – possibly the largest challenge traditional publishers have faced since Google. The thinking now goes that instead of using facebook newsfeed as the link to the NY Times, maybe NYT would be better off simply putting all its content right on Facebook.
This may sound the like the dumbest idea ever for NYT, but if the point of the exercise is to serve content right where the audience is, and that audience is on Facebook, then why even bother to try and shift them. Plus, the Facebook audience is so much larger than NYT that… well you get the picture. And don’t rule it out – the idea has gained a lot of traction with publishers like the NYT already.
Google will follow on Friday. This one has underperformed significantly in the past year, essentially picking up nothing of the 20% rise in the NASDAQ, as investors fret that the company has lost its mojo, advertising wise. Most of this is about Google’s failure to monetise the growth on the mobile phone and tablet as fast as Facebook and its strongly performing properties Instagram and WhatsApp, or Yahoo’s Tumblr.
Critics have a point. Microsoft’s failure as a growth company is largely due to its inability to recognize that the smart-phone puts a computer right in the user’s hands, one which by-passed the desktop and so didn’t use a Windows operating system. There endeth that lesson, but investors are now worried that Google, as smart as it is, still doesn’t appreciate the magnitude of the mobile shift. Lastly, as a footnote, I would be surprised if the EU action on unfair practices by Google regarding search ranking is a serious issue for the company. Google is not a regulated utility – it is under no obligation to provide “fair” data to its users, who are free to use other search (Bing) if they don’t like it.
Investors will be expecting an update on the progress of Amazon’s cloud business, which sent the stock higher by US$60/share, or US$30b, just after the release of the last quarter’s earnings. Amazon’s numbers in a general sense are somewhat irrelevant – it is still a start-up plowing all its cash into rolling out new distribution centres in the UK, Germany, China etc, and so will always report depressed earnings. Revenues are a better guide.
Apple reports Tuesday Australian time. First quarter saw a profit of US$18b net, yet Wall Street is forecasting a full year net of only(!) US$50b. So another quarter with another US$18b would create a mighty disturbance in the force. The iPhone 6 has definitely hit the top notes for Apple, but all eyes will be on the early orders for the watch (they are not yet commercially available, except for tests and reviews,). If the vibe is strong from Tim Cook (and in part it will be down to that, since watch orders only commenced post the quarter’s end) and the net profit number is anything north of US$11b, expect fireworks. And remember, no-one even went close to guessing the company’s revenue would grow by 29% on the back of the iPhone, and last time I checked, it was still selling strongly. The key point about Apple is that its multiple is lower than Telstra, under 10x EBIT, while Telstra is over 13x.