23rd July 2014
Janet Yellen, Federal Reserve Chair, commented recently that, “Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries.”
Brenda Kelly, Chief Market Strategist at IG Group, discusses the opportunities for investors in the technology sector.
“They say one should ‘never fight the Fed’ and while Yellen seems to have fired a warning shot earlier this month in respect of ‘some’ equity valuations market; investors have one strategy – to buy the dip.
“This has been a singular unfailing method since those dark days in 2007/08 and as long as QE remains – the ‘Fed Put’ will be there and the so-called strategy will continue. I write this as I witness yet another all-time high in the S&P500.
“So what about firms in social media? Can Janet possibly be referring to the likes of Facebook and Twitter? Certainly there is a stark contrast between the individual performances this year.
“Facebook is set to post its second-quarter figures on this evening after the bell; Wall Street is expecting adjusted earnings per share of 0.32 on $2.807 billion of sales, resulting in a pre-tax profit of $1.372 billion.
“Bear in mind that Facebook had a rocky start, with the share price falling some 40% in the four months subsequent to its IPO. Essentially, once investors began to question exactly how this company was going to drive revenue, the shine wore off.
“Growth in user base is one thing and in many respects a useless metric but successful monetisation of that user base is what makes the stock attractive. Once the monetisation part is worked out then user base growth becomes ever more important once again as revenues will then look set to rise even further.
“The trick for social media companies looking to profit as ad platforms is to find the best way to insert advertising into the user’s experience without impacting the user in a negative way. This is certainly an area that Facebook has succeeded in against the odds. The rapid conversion to mobile by its user base was a stumbling block. 543 million Facebook users access the site through mobile devices.
“Facebook has integrated in-stream ads to the user experience which has helped resolve the issue. Response rates are high, investors are sated and the share price has rebounded.
“Brokers look rather bullish on the stock with only six sell recommendations on this stock – this in spite of the fact that the stock price has been a bit of a slump since the release of its Q1 earnings.
“Many saw the Twitter IPO as a proxy for the missed capital gains in Facebook and this would explain the 60% spike to what is still it’s all time high of $74 per share back at the end of 2013. Twitter was given the benefit of the doubt early on by investors but now finds itself in the same situation as Facebook in the initial stages of flotation. How will it make money?
“First quarter revenue was $250m, an increase of 119% on the previous year of $114 million. Yet the monthly active user number was not what most investors had hoped – only a 6% gain versus the previous quarter.
“This time round, the social media company is expected to report a loss of $0.01 on revenue of around $283 million.
“A shake up in management gave the share price a small boost as the company accounted it was appointing former Goldman Sachs banker Anthony Noto as its chief financial officer. So market participants are reasonably happy with the skill sets Mr Noto will bring. With his banking background and indeed his previous tenure as CFO of the NFL he will be well aware of what investors seek. Gaining more ground in TV and advertising will more than likely be his first action and provide the new direction that the company clearly needs to attract users, revenue and ultimately investors.
“Twitter has also revamped its analytics to show impressions and engagements corporate users can finally assess their organic and paid-for reach and while this may seem like a small development, this can effectively allow a business to ultimately work out if Twitter as a medium is worthwhile utilising.
“As a medium, the social media site certainly came into its own during the World Cup with a huge uplift in activity as the competition heated up in Brazil. A huge 618,725 tweets per minute were posted during Germany’s final victory over Argentina. This saw a new record made for the total number of tweets posted during a sporting event – 35.6 million.
“The arrival of the mute feature may well have put a damper on the organic reach of a tweet but this can be overcome via paid tweets – promoted tweets remain immune from the mute feature.
“More recent global events have made Twitter the first news source medium. It’s said that the first five minutes on Twitter following a significant event are the best while the 24 hours that follow are the worst as the lack of filter and source reliability ramps up.
“Amazon recently partnered with Twitter to create the AmazonCart hashtag – a function that adds items to a user’s shopping trolley- its early days but this may well be the ticket to Twitter successfully monetising its user base.
“Steady gains in sales are a given for Twitter but this will need to be translated into higher earnings per share. The mobile ad strategy will be a key point for the stock watchers – it will need to show itself as a viable alternative to Facebook. That will be no mean feat.”