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.

WEEKLY STOCK PERFORMANCE
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).
CHANGE

SINCE JAN 18

CHANGE

SINCE JAN 18

P

GOOG

GRPN

FB

YELP

LNKD

JIVE

YHOO

9.3 %

7.0 %

6.5 %

6.3 %

4.3 %

4.0 %

1.8 %

1.7 %

SINA

ZNGA

RENN

ANGI

OPEN

MM

BIDU

WEBM

1.7 %

1.6 %

0.9 %

0.5 %

(0.7%)

(1.0%)

(1.7%)

(5.9%)

COMMENTARY
EARNINGS SEASON
  • 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.
Facebook
  • 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.