Social Media Stock Tracker: Google and Netflix Delight Investors

The social media sector performed well this week with an average weekly gain of 2% as GOOG’s Q4/12 earnings drove the company up 7%, showing marginal CPC improvement, which have been under pressure in the last year due to the continued user shift from desktop to mobile (see Commentary). Pandora’s stock also rebounded strongly, though this was not based on any fundamental news, but rather it is likely on speculation of improved mobile ad performance flimsily based on GOOG’s results.

The social media sector performed well this week with an average weekly gain of 2% as GOOG’s Q4/12 earnings drove the company up 7%, showing marginal CPC improvement, which have been under pressure in the last year due to the continued user shift from desktop to mobile (see Commentary). Pandora’s stock also rebounded strongly, though this was not based on any fundamental news, but rather it is likely on speculation of improved mobile ad performance flimsily based on GOOG’s results.
Impressively, the social media sector was able to shine despite the negative investor sentiment around AAPL’s earnings (down 12% on the week). For the calendar year of 2013, the average return for the social media sector is a gain of 8%. Though not in our social index, NFLX had an unbelievable jump of 71% this week based on increased profitability and subscriber additions well ahead of consensus expecations. Next week we will see notable earnings from YHOO and AMZN, though all eyes will be on FB (see Commentary).
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  • GOOG announced their Q4/12 earnings to a positive reception with standalone gross revenue (excluding the discontinued Motorola home business unit) of $12.91bn (a 21% increase year-over-year which represented acceleration vs. the 17% in the previous quarter) beating consensus numbers of $12.73bn. On a non-GAAP EPS basis, Google reported $10.65, beating consensus of $10.61 (though this included the loss from the discontinued Motorola segment).
  • GOOG’s Cost-Per-Click (CPCs) were up 2% q/q, but down 6% year-over-year, which were better than Wall Street’s expectations, which is likely a major factor in the positive market reaction to this earnings report. We maintain that reversing the downward pressure on ad prices during the continued shift to mobile is a key factor for the potential growth of GOOG’s stock in 2013, though Traffic Acquisition Costs (TAC) remain a concern and were slightly higher on a y/y basis. The company noted that its policy changes to improve the user experience with ad products such as restricting the number of ads per page, were critical in improving CPCs, and GOOG expects to see these positive impacts continue in the next several quarters.
  • NFLX reported strong results in its Q4/12 financials, with revenues of $945mn (vs. consensus of $935mn) and adjusted EPS of $0.29, well above consensus of $0.09. Lower content costs and increases in domestic and international subscribers drove profitability and helped reposition the stock in the investor community resulting in an astounding 71% one week gain. Guidance for domestic streaming subscribers in Q1/13 was a midpoint of 1.75mn, well ahead of consensus at 1.2mn.
  • With the focus on FB’s earnings next week, investors should take a lesson from AAPL and note that a company’s results matter less than how those results compare to expectations. With FB, we continue to warn investors that there is no evidence that suggests sell-side “channel check” inputs have been highly correlated to FB’s financial numbers in the past. These inputs cannot be relied upon as third party ad studies are too small and sometimes anecdotal in nature. However, we do admit that GOOG’s Q4 improvement in CPCs seems to indicate that mobile ad pricing may reach a positive tipping point in the future, and the main issue for FB in the last year has been the cannibalization of its desktop ad revenue due to the user shift to mobile.
  • Heading into the quarter, consensus revenues for Q4/12 remain at $1.52bn, which is a forecast of a re-acceleration on a year-over-year basis (35% in Q4/12 vs. 32% in Q3/12), and indicates a 21% quarter-over-quarter growth vs. a 7% gain in Q3/12. Though it is difficult to forecast the payments and fees performance, if that segment were to be flat in Q4, FB’s Q4/12 advertising revenue will need to grow 24% q/q (which is something that FB has not achieved in eight quarters) to meet expectations. In order to give comfort to these numbers, FB bulls should look for Gifts to bolster the payments and fees segment, and a ramp of News Feed ads, (Sponsored Stories, Promoted Posts, and App Install ads).
  • In particular, the number that we feel will have the greatest impact on investor sentiment will be the mobile component of News Feed ads, currently modeled at $354mn by consensus. If mobile News Feed ads significantly beats that estimate (perhaps above $400mn), driving the total Sponsored Stories revenue near $500mn, this may boost the stock to and slightly above its IPO pricing levels of $38 per share, although conservative investors should keep in mind that FB’s shares are up 59% in the two months since the company’s lock-up expiration on November 14.
  • Lastly, we believe that user engagement will be a very important indicator for the company’s performance throughout 2013 (not just in the near term), which has been essentially flat in FB’s primary market, North America. If engagement weakens, this would be a serious problem for the company down the road, and we believe that engagement metrics will be under increased pressure during the second half of 2013 in particular.
FB rolled out its conversion measurement system for marketers globally (after limited launch in November), which measures and reports when a user views an ad on one platform, but converts on another (such as mobile vs. desktop).

The company announced earnings which disappointed investors even though the company continued to perform well. The main issue is that analyst/consensus expectations were not met on revenues, and AAPL’s guidance for the next quarter was also below expectations ($41bn-$43bn vs. $45.6bn consensus).

The company updated its Cloud Drive Photos app will enable automatic uploads to its cloud server.

AMZN announced a new In-App purchasing service that enables developers to let customers use their Amazon accounts to purchase virtual goods and currencies from within Mac, PC and Web-based games.

The company acquired IVONA Software, a text-to-voice company (technology is implemented into Kindle tablets), for an undisclosed amount .

GOOG’s Q4/12 earnings were solid with standalone revenue which beat consensus and more importantly, slightly improving CPC numbers which may indicate signs of a turnaround in the company’s ad prices.

GOOG updated its image search to display image results in an inline panel for easier scrolling/flipthrough, as well as showing metadata info on the search results page.

Orange, the international telecom, noted that GOOG is paying it "hundreds of millions" to offset the cost of delivering GOOG’s services to mobile subscribers (mainly YouTube traffic).

In a Transparency Report, GOOG noted that U.S. requests for private data increased by 136% by the end of 2012 from the second half of 2009, of which 68% were made under Electronic Communications Privacy Act subpoenas (and GOOG complies with 90% of those requests).

GOOG opened an office in the Philippines to better position itself in the growing South-East Asia market.

In the context of the increased media and political attention on gun control in the U.S., GRPN halted all gun-related deals in North America.

NFLX reported strong Q4/12 results, beating on revenues and earnings, with increased profitability owing to lower content costs and increases in domestic and international subscribers resulting in an astounding 71% one week gain.

Data from a new report from the NPD Group indicates that more than half of consumers age 18-24 that have a TV connected to the Internet watch Netflix on TV.

Serendip launched its iOS app which allows serendipitous music streaming using data from friends aggregated with music data from YouTube, Vimeo, SoundCloud and Bandcamp.

Though unconfirmed by the company, it appears that Sina has partnered with Qihoo 360 on a web games platform, including cooperation of game promotion, event planning, and content.

Spotify announced a partnership with Orange that will result in "Orange Young," an unlimited music service for the under-27 market in Switzerland which includes unlimited calls, texts, and prescribed mobile data packages, with rates as low as $20 a month.

Keith Rabois, the COO of Square, has resigned from the company, and Sarah Friar, currently the CFO, will become acting COO. The WSJ speculated that Rabois resigned due to a sexual harassment claim, though this is unsubstantiated at this time.

Tumblr updated its dashboard for initiating posts by streamlining the screen into bite-sized pieces that evoke an easier and faster mindset for users.

The company launched its Vine video sharing app (Twitter acquired Vine in October) which allows users to shoot videos that cut together into a 6-second version for sharing. In related news, FB blocked Vine from its Find Friends API and it recently closed off access from its social graph from a number of other parties.

Twitter announced an updated to its Embedded Tweets, which will now provide more content and context (text, photo, and video summaries, as well as engagement counts).

The company acquired, a Pinterest-style bookmarking site, for an undisclosed amount (appears to be less than $20m). will shut down its website and will the engineers will work on similar technology projects at YHOO.

In an interview, YHOO noted that its overall strategy is to reposition its site as a personalized content discovery hub (including Yahoo Search).

The company launched a pilot version of Wonder, a voice-powered social search app that integrates proprietary search data with information from social networks including Facebook, Instagram, Twitter, and Foursquare.

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