Facebook Earnings: Solid Quarter, Though a Little Cost Control Would Be Nice

I joined CNBC’s Sri Jegarajah last night on Capital Connection to chat about Facebook’s (FB) first-quarter earnings.

If you cannot view the embedded video, please follow this link.

Overall, a very solid quarter. Revenues were up 42% and 49% after adjusting for currency moves. Perhaps most impressive, given that roughly half the world’s internet-enabled population is already on Facebook, is that the company is still growing its monthly active user base at a 13% annual clip. And average revenue per user in North America jumped by 42% from $5.85 to $8.32. That’s impressive performance no matter how you slice it.

Facebook also buried any lingering doubts about mobile profitability. Mobile ad revenue accounted for 73% of the total.

Unfortunately, Wall Street was a lot more interested in Facebook’s ballooning expenses. Total expenses were up 83%, and research and development expenses more than doubled. Zuckerberg defends the spending spree as investment in Facebook’s growth, but from a distance it looks like very sloppy cost control.

Separately, Google (GOOGL) is desperately trying to follow Facebook’s lead in mobile.  Dubbed “Mobilegeddon,”  Google recently made a major change to its algorithm that effectively rewards sites that are optimized for mobile and punishes sites that are not.

Now, there are two ways to view this. It could be that Google is looking out for its users. By improving the search rankings of mobile-friendly sites, they are saving you the frustration of waiting for non-optimized pages to load on your iPhone.

But I suspect Google also has other motives. Google makes less money on mobile ads. But by improving the mobile browsing experience by rewarding mobile-friendly sites, Google makes mobile ads more attractive for would-be advertisers. That should ultimately mean more mobile ad revenue for Google down the line.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he had no position in any stock mentioned.

Facebook and GSV Capital on the Slant

Jeff Reeves at The Slant did a write-up on Facebook ($FB) and GSV Capital ($GSVC) that featured some comments from my last newsletter:

You’ve heard of Facebook, but you’ve probably never heard of GSV Capital.

But if I told you GSV Capital is a major Facebook investor gapped up almost 50% in the last month, you’re probably a bit more interested. Right?

One investor who wasn’t surprised was Charles Sizemore, who touted GSV Capital way back in January right here on the The Slant.

Here’s what he had  to say in his latest issue of the Sizemore Investment Letter now that he’s been validated in his call:

“The market noticed the big ‘free money’ sign hanging in front of GSV Capital’s door. After languishing for all of 2013, GSV’s shares have risen by more than half in the past month. And I expect further gains of 50%-100% in the coming 12 months.

The good news is that GSV is still cheap. Its book value as of June 30 is estimated to be about $250 million. Its market cap, even after the run-up, is still just $227 million. So, GSV is trading at a discount to book of about 9%, and again, I expect that book value to be revised upward as investor enthusiasm grows for Twitter.

If you haven’t bought shares yet, it’s not too late. But do be careful. GSVC is a tiny company with a low average trading volume. Use a limit order and average into your position over the course of a few days or weeks.”

Read full article here.

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Microsoft, Apple and Big Tech for the Remainder of 2012

Last week, I suggested that Microsoft ($MSFT) would be the ultimate winner in the long war for dominance of the smartphone and tablet markets.

Though Apple ($AAPL) dominates today, it has no real defensible “moats” that would prevent an aggressive competitor from muscling in on its turf.  Consumers are notoriously fickle, and there is little to lock them into the Apple ecosystem.  You can access your key services—such as Facebook ($FB), Twitter, Skype and even Apple’s iTunes—from just about any device, after all.  And if Microsoft is able to leverage its dominance of the desktop market by familiarizing users with its Windows 8 operating system—which looks and feels more or less the same on desktops, tablets and smartphones—Microsoft may well dig the elusive moat that Apple has thus far been unable to dig.

Moreover, Apple’s “idea man,” the late Steve Jobs, is not something that can be replicated, and going forward Apple will find it increasingly harder to stay ahead of its competition.

As Apple discovered to its dismay during the PC era of the 1980s through the mid-2000s, computers are ultimately commodity products for which it is difficult to charge a premium (and yes, I lump smartphones, tablets and PCs together as “computers”).  The iPhone’s popularity has been bankrolled by generous subsidies by service providers like AT&T ($T), Verizon ($VZ) and Sprint ($S).  But as these carriers start to push back against subsidies, Apple will find it harder to maintain its margins without lowering its prices—something the company will be reluctant to do.  In a very short period of time, Apple may again see itself fall from the position of industry leader to that of a niche provider.

None of this suggests Apple’s imminent demise, of course.  As I wrote in the previous article, I’m talking about a long war of attrition that may take a few years to play out.

But none of this matters in the short term.  In the short term, I expect most Big Tech stocks to move together in a fairly tight correlation as investors reassess the economic picture.  For the remainder of 2012, I see investor risk appetites returning, and I see Apple and its competitors Microsoft and Google ($GOOG) leading a rally in technology shares.

I recommend investors pick up shares of the Technology Select SPDR ($XLK) and plan on holding for the remainder of 2012.

With the bad earnings releases of the third quarter mostly digested, I expect to see a broad-based market rally, and I expect more cyclical sectors such as technology to lead.

Disclosure: Charles Sizemore is long XLK through his Tactical ETF Model. This article first appeared on TraderPlanet.

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