- On July 15, 2014 Federal Reserve Chairwoman Janet Yellen stated that equity valuations of social media and biotechnology firms appeared to be "stretched".
- In the last week CBI (a blue chip industrial), and TWTR (a social media company), announced second quarter financial results which soundly beat analysts expectations.
- The reaction of Wall Street to CBI's and TWTR's second quarter earnings shows how value investors and momentum investors differ on their current view of the market.
Are Social Media Stocks (Stretched)
On July 15, 2014 Federal Reserve Chairwoman Janet Yellen stated to the Congress, "Equity valuations of smaller firms as well as social media and biotechnology firms appear to be "stretched". This remark created quite a stir on Wall Street and in Silicon Valley, with the usual suspects denying this was true. 2014 second quarter reports recently released by Twitter, Inc. (NYSE:TWTR) and Chicago Bridge & Iron Company (NYSE:CBI), however, lend support to her statement.
On their face both quarterly reports looked good and beat analysts expectations. The reaction to their share prices, however, was quite different. On the day after their releases TWTR's shares were up 19%, while CBI's were down 9.2%.
TWTR is a social media company that went public in 2013 and has never had any GAAP calculated earnings, but has good growth in other metrics. CBI is a global industrial company in the energy field that was founded in 1889. In 1997 it changed its corporate structure by becoming a Netherlands Corporation. It has been consistently growing its earnings since it became a Netherlands corporation.
TWTR's Second Quarter
On July 29, 2014 TWTR announced its second quarter financial results. Although TWTR, who went public in 2013, has never had a GAAP calculated profit, it has shown substantial growth in other metrics. Its second quarter GAAP loss was $145 million a 245% increase over it $42 million loss in the same period last year. The company did have a non-GAAP profit of $14.596 million compared to a $16 million loss in the same period last year.
TWTR did report substantial growth in metrics other than profits.
- Revenue was $312 million, a 124% year-over-year (yoy) increase.
- Average Monthly Active Users (MAU) increased 24% yoy to 271 million.
- Mobile MAUs increased 29% yoy to 211 million.
- Advertising revenue per thousand timeline views increased 100% to $1.60.
The revenue numbers and the non-gap profit substantially beat anlaysts estimates. As a result the stock soared 19% on the day after the announcement.
CBI's Second Quarter
On July 24, 2014, Chicago Bridge & Iron released its second quarter financial report that showed non-GAAP diluted earnings per share of $1.36 that beat Zacks Consensus Estimates by 7.1%. In addition revenue was up 16% from the second quarter of 2013, and adjusted income from operations was up 38% from the comparable period of 2013. The company also announced a record backlog of $30.5 billion, up from $27 billion at the end of 2013.
The day after the report was released, CBI share price was down 9.2%. StreetInsider.com inferred that the decline may have been due to a negative twitter comment by Prescience Point about CBI's widening cash flow. CBI's cash flow went from a negative $300.742 million in the first six months of 2013 to a negative $374.363 million in the first six months of 2014. CBI's management indicated (after a question from an analyst in a earnings conference call), that the negative cash flow was temporary and they expected positive cash flow by the end of the year.
Share prices react for various reasons after quarterly financial reports. In this article I am not giving opinions on whether the share price activity of TWTR and CBI was justifiable. The purpose of this article is to discuss the current mood of the market, which in my opinion is a tale of two cities. TWTR and CBI are very different companies. I consider CBI to be a blue chip, value company, with consistent earnings. TWTR is a high growth social media company, with limited if any earnings depending on whether you use GAAP or non-GAAP accounting. Both of the companies had what most investors would consider strong second quarter financial numbers, and beat analysts expectations. The reaction to the reports, however, were markedly different and tells me that value investors are sitting on the side lines and waiting for a substantial correction, while the momentum players are looking for reasons to damn the torpedoes and charge full speed ahead.
The comments of Yellen on "stretched" valuations does not appear to have shaken Wall Street, and it looks like the party is going to continue, at least in the social media world. Today there is a rumor that Alibaba Group Holdings Ltd (Pending:BABA) has offered to buy Snapchat Inc. (a privately owned social media company), for $10 billion. Last year Snapchat Inc. turned down an offer from Facebook Inc (NASDAQ:FB) for $3 billion. Snachat Inc is based on an app that makes photographs disappear and was started by 23 year old Evan Spiegel. Most initial development in the app was done in his father's garage in 2012. In January 2014 the company had 35 employees. Snapchat Inc. is only one of the latest stories about billion dollar prices for social media startups. It does appear that Yellen may have had a point in her recent comments of above average valuations on social media companies.
I have never invested in social media companies for the simple reason that most of them have little if any earnings, and their prices are primarily based upon projections for future growth. Its also my opinion that most of the big money in these companies is made by the venture capitalists and not by retail investors. I also don't know how many other social media gurus are out their working in their father's garages on apps that could replace the current crop of social media companies. It doesn't appear that barriers to entry in this business is very high. I also don't think there is any 23 year old, currently working out of a garage that is going to replace the likes of a CBI in the near future.
Although it is tempting to try to get in and out of bubbles before they burst, the current market looks too much like the late nineties to me. I think this might be the time to heed Warren Buffett and "be fearful when others are greedy and greedy when others are fearful". In this market I would be a buyer of CBI and seller of TWTR.