Introducing The Millennial Stock Portfolio (Part 5)

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Includes: FB, NFLX, TWTR
by: Matthew D. McCall

Summary

Facebook is the choice among millennials.

Twitter is connecting the world.

Netflix has the ability to continue its dominance.

The fifth and final installment wraps up the last three stocks in our millennial portfolio.

Facebook Inc. (NYSE: FB) is a worldwide social media company, and is one of the most recognizable brands in the world, right next to companies like Nike and Apple. The addition of social media to the everyday life of a millennial could be considered the single most impactful and important innovation since the Internet.

Despite the vast array of social media platforms currently available, Facebook is the most popular with 91 percent of millennials on it and the second most used social media among millennials is Facebook-owned Instagram with 46 percent. As you can see, Facebook has an incredible market share amongst millennials, and is showing no signs of slowing down. Much of their success in this marketplace can be attested to their CEO Mark Zuckerberg who is a millennial himself.

Facebook posted a very solid second-quarter report, as revenue increased by 61 percent to $2.9 billion versus $1.8 billion last year. Earnings per share came in at 31 cents, up from 14 cents a year earlier, an increase of 121 percent. When the company went public in 2012, it generated earnings per share of 53 cents for the year. That number is expected to come in at $1.63 this year and increase to $3.69 by 2017. The forward P/E ratio of 37.3 is about double that of the S&P 500; however, the growth potential is much higher for FB's earnings, putting the PEG ratio at 1.21.

After going public in May of 2012, the stock fell as investors questioned the mobile revenue potential. The question was answered as the revenue and earnings started to pour in from mobile users. After hitting a low of $17.55 in September 2012, the stock has rallied to nearly $80 in late September. The stock has outpaced the market and shown strong relative strength during market selloffs, two attributes of a technically strong stock.

Twitter Inc (NASDAQ: TWTR) is a global platform for real-time posts and conversation. It is currently the most used non-Facebook mobile platform among millennials, with 39 percent of the group calling themselves users. TWTR is different from many other social media platforms because it allows for an easy and quick exchange of real time data and events. With 85 percent of millennials accessing social media from a mobile device, Twitter taps into the desire for users to post as they are experiencing something, not after the fact.

The company's invention of the hash tag revolutionized social media as well, allowing every post with the same hash tag to be categorized and viewed next to each other instantly. TWTR will likely continue to expand and attempt to chase down Facebook, acquiring smaller social media outlets and incorporating them in their platform as it did two years ago with Vine. As mobile devices look to remain a fixture in the everyday lives of millennials, social media companies like TWTR will continue to flourish.

Revenue during the second quarter increased by 124 percent from a year earlier as it came in at $312.2 million. The net loss increased to $144.6 million from $42.2 million last year due to higher costs and expenses.

When 2014 is wrapped up, the company is expected to record its first annual positive earnings at 10 cents per share. Analysts are looking for earnings to take off from there with 37 cents in 2015, 82 cents in 2016, $1.48 in 2017, and $2.08 in 2018. Granted it is nearly impossible to forecast out that far; however, the trend is clearly moving in the right direction - at an above average growth pace. The forward P/E ratio is a large 134.6, but based on 2016 earnings the ratio falls to 61. Investing in TWTR today is based on the expansion of its ad sales and increased penetration around the world that will lead to continued earnings expansion for years to come.

Netflix Inc. (NASDAQ: NFLX) allows users to buy or rent movies and TV shows, which are streamed through the Internet or sent via mail. The crux of the business and the attraction to millennials is the online streaming network of movies, TV shows and documentaries for a monthly subscription. This trend has been boosted by the increased usage of internet-connected TV devices like Apple TV, Google Chromecast, Xbox and PlayStation that make it much easier for millennials to stream content.

At the end of the third quarter, the streaming service had 50.1 million subscribers with revenues of $4 billion. A large portion of the success can be attributed to its original series like House of Cards and Orange is the New Black. While the number sounds large, in the most recent earnings report the subscriber growth was less than expected and the stock lost over 20 percent of its value in one day. The company added 3.02 million streaming subscribers as it raised its monthly charge by $1 to $8.99. The company expects to add 4 million new subscribers in the fourth quarter as its expansion in Europe continues.

Out of all the millennials that have a paid digital presentation subscription, about half subscribe to Netflix, with Amazon Instant Video coming in second at 25 percent. As technology continues to evolve, Netflix will likely be streamed more frequently on different types of mobile devices further increasing their market share. However, competition is also increasing at an alarming rate.

Based on expectations of 2014, earnings per share of $3.51 the stock trades with a P/E ratio of 104 and with slowing subscriber growth there is a level of concern that is hanging over the company. That being said, earnings per share are estimated to rise to $18.83 by 2018. That would knock the P/E ratio down to less than 20; however, that is 4 years in the future. While NFLX is clearly the leader for online video streaming today, the one question is will it continue to hold onto its dominance? If it can, the stock would be a millennial favorite for years to come.

All 15 stocks in the Millennial Portfolio have been revealed and they all have one important characteristic in common - the millennial. What makes the portfolio unique is that it includes companies from an array of sectors. It also includes companies that have been in business for decades as well as new IPOs to hit the market in the last few years. Then there are high-growth companies with little to no earnings as well as extremely profitable valuation plays.

From an investing viewpoint, the millennial generation will be the spending leaders in this country for years to come and by owning companies that will benefit from that trend makes sense. There are a large number of ways to accomplish that, but there is no one stock that will encompass the entire millennial movement. Therefore, by starting to build a diversified portfolio with the 15 stocks highlighted in this series of articles an investor will cover nearly every angle of the rise of the millennial.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.