Facebook Beats Estimates - Big Tech Gets Over Regulatory Issue Quickly
Facebook Beats Estimates even after big industry news. The news of the DOJ investigating market leading platforms sent the big tech names lower after-hours on Tuesday. But they quickly got over it on Wednesday.
Apple stock only fell 8 basis points, Amazon was up 0.32%, and Facebook was up 1.14%. Facebook reported great earnings which helped its stock rally after hours as well.
These stocks shirked the news because it wasn’t a shock that the DOJ announced an investigation. We need to see the DOJ come down on these firms by more than expected for their stocks to fall significantly.
Big Rally To Record Highs
Facebook Beats Estimates - The market had a major rally on Wednesday as more firms reported earnings. As of Wednesday morning, S&P 500’s Q2 EPS growth was 4.15%. 77% of firms beat estimates by an average of 1.28%.
Average surprise rate has recently declined. It is much lower than the 6.21% surprise rate in Q1. 67% of firms have beaten sales estimates with growth of 3.51%.
S&P 500 and Nasdaq rallied to new record highs and Russell 2000 had a phenomenal day. It was led by the small banks. S&P 500 was up 0.47%, Nasdaq was up 0.85%, and Russell 2000 was up 1.64%.
KBW had an amazing day as it was up 2.37%. VIX was down 4.28% to 12.07. That’s very low, but there won’t be a big spike in volatility unless earnings take a major turn for the worse.
Only sectors that fell on Wednesday were consumer staples, materials, and real estate which were down 0.64%, 2 basis points, and 7 basis points. Communication services and the financials had a solid day. They were the 2 biggest winners, increasing 0.88% and 0.91%.
As you can see from the chart above, the Philadelphia Semiconductor index has rocketed to a new record high. It was up 3.05% on Wednesday and is up 26% in the past 2 months.
Clearly, semiconductor investors are betting on a global cyclical rebound. There is no evidence of such a rebound, but prior mini-cycles have bottomed where the growth is now. Unless there is another shoe to drop, there might be a rebound in 2020. R
emember, the global economy showed weakness starting in 2018. Last year was a good year for America because of the fiscal stimulus. That explains why America is behind the rest of the world when it comes to rate cuts. The international central bank easing in the past few quarters might help the global economy rebound next year.
Facebook Beats Estimates - Reports Amazing Earnings
2 most important earnings reports on Wednesday were from Facebook and Tesla. Let’s look at Facebook first. The firm reported $1.99 in EPS which beat estimates by 11 cents. It reported revenues of $16.9 billion which beat estimates for $16.5 billion.
Its stock was up after-hours; it increased 0.87%. It should hit its record closing high this week. Its record high is $209.44 and it closed on Wednesday at $204.66. The selloff related to the Cambridge Analytica scandal was a great buying opportunity.
On Wednesday, the firm put the scandal behind it as it took a $5 billion fine from the FTC which is the regulatory agency’s largest fine ever. Obviously, the issue isn’t totally behind Facebook because users remember what happened.
They aren’t leaving Facebook platforms, but they do want change. Meaning, Facebook needs to spend more money to beef up security and hire new workers. Its headcount increased to 39,651.
On privacy spending, its CFO stated, “The privacy efforts do require significant investments obviously in compliance processes, people and technical infrastructure.” He added privacy investment “will have an impact on our overall product development.”
As you can see from the chart above, monthly active users increased from 2.38 billion to 2.41 billion which met estimates. That’s 8.1% growth which is impressive given Facebook’s massive size.
Facebook Beats Estimates - Average revenue per user was $7.05 which beat estimates for $6.87.
That’s 18.7% growth from last year. As I predicted would happen, Facebook discussed the DOJ investigation. Mark Zuckerberg didn’t say what I predicted as he stated, “We believe that there needs to be a regulatory framework in place. My broader concern is that if that doesn’t get put in place, then frustration with the industry I think will continue to grow.” Facebook wants guidelines, so if there’s an issue, it can defend itself by saying it is following the guidelines.
On the actual business, daily active users in Europe were flat at 286 million and in U.S. and Canada users were up 1 million to 187 million. The biggest transition the company has been working on in the past few quarters is going from News Feed to Stories which is a copycat of Snapchat. The firm already has 500 million daily active users for Stories on WhatsApp, Instagram, Facebook, and Messenger.
Tesla’s Weak Quarter
Facebook Beats Estimates - Tesla’s main focus of is getting to profitability in the 2nd half of the year. Its Q2 results didn’t make investors confident it will achieve that goal.
Losses per share were $1.12 which missed estimates for 40 cents. Revenues were $6.35 billion which missed estimates for $6.41 billion. Its stock fell 11.02% after-hours on these weak results. Good news is the firm reaffirmed its 2019 guidance to deliver 360,000 to 400,000 cars which are mostly Model 3s as it is its cheapest option.
While the firm reaffirmed its full year guidance, results need to be back-half heavy if it is to be met. It delivered 158,200 cars in the first half which means it needs to deliver 201,800 just to get to the low end of guidance.
Its weekly production run-rate of Model 3s is 7,000 and it aims to get to 10,000 by the end of the year. Tesla has been mired by complaints about working conditions in its tent which was originally supposed to be temporary.
The tent was created because its production facility was too heavily reliant on robots which hampered efficiency and effectiveness. The vehicles in the tent are largely built by workers.