The Harder They Fall
…Facebook’s epic crash. Amazon does Amazon. Facial Rekognition sort of works. Earnings roundup: Intel, Starbucks, Chipotle, airlines. GDP tomorrow.
Financial Review by Sinclair Noe for 07-26-2018
DOW + 112 = 25,527
SPX – 8 = 2837
NAS – 80 = 7852
RUT + 10 = 1695
10 Y + .04 = 2.97%
OIL + .24 = 69.54
GOLD – 9.00 = 1223.40
The bigger they are, the harder they fall.
Facebook posted the largest one-day loss in market value by any company in U.S. stock market history after releasing a disastrous quarterly report. Facebook’s market capitalization crashed by about $120 billion to about $510 billion as its stock price fell by more than 19 percent. At Wednesday’s close, Facebook’s market cap had totaled nearly $630 billion. No company in the history of the U.S. stock market has ever lost $100 billion in market value in just one day. The closest runner-up – Intel lost $90 billion in one day back in 2000. Earlier that year, Microsoft lost $80 billion from its market cap in one day. Today, Facebook shares dropped $41.24, to close at $176.26, and decline of almost 19%; that’s almost bear market territory in one day.
After the close yesterday, Facebook reported weaker-than-expected revenue for the second quarter as well as disappointing global daily active users, a key metric for Facebook. The company also said it expects its revenue growth rate to slow in the second half of this year. But an earnings miss does not explain the crash in share price and market cap – the problems with Facebook are deeper than that. The problem is how Facebook executive management’s handled events since mid-March, when The New York Times reported that the voter-profiling company Cambridge Analytica had effectively harvested the data of up to 87 million Facebook users. The scandal sparked a larger, ongoing conversation around users’ data privacy and calls for government regulation. And Facebook botched the scandal at almost every turn. Facebook ignited a series of course corrections and apologies that haven’t gone over well with many pundits, analysts and investors. And while Facebook CEO Mark Zuckerberg has conducted his fair share of interviews everything from congressional testimony to a controversial sit-down last week touching on Holocaust deniers – and Zuckerberg was off-key at every event.
To add insult to injury, Facebook management on Wednesday’s earnings call warned of slower revenue growth for the third- and fourth-quarters in the high-single digits because of factors that include more data privacy options for users — in direct response to the Cambridge Analytica scandal — and the promotion of newer initiatives like Stories and Watch. Zuckerberg has been talking and writing about fixing the business for months now, and yesterday the analysts and investors suddenly realized that there is a price associated with the fix, because the real fix involves a vastly different business model, that does not sell customers’ privacy.
Amazon reported better-than-expected earnings but a miss on revenue. Amazon reported earnings-per-share of $5.07, higher than analysts’ expectations of $2.49 per share – that works out to about $2.5 billion in net income. Net sales for Amazon Web Services, or AWS, climbed to $6.1 billion, which is up from $4.1 billion during the same period in 2017. Amazon’s sales of $52.9 billion missed analysts’ expectations of $53.35 billion. Likewise, the company’s forecast for the third quarter was mixed compared with Wall Street’s projections. Amazon expects its sales to fall shy of analysts’ predictions but its operating profits to exceed them. Amazon stock was still up nearly 4% in after-hours trading, then drifted, but still held on to 2% gains.
Amazon’s second-quarter results benefitted from the dollar’s appreciation against other currencies, which boosted the dollar-value of its overseas sales. That factor added $760 million to its revenue and $466 million to its net income in the period. Without the foreign-exchange effect, Amazon’s revenue miss would have been even more dramatic, and its sales growth for the period would have been 37% instead of 39%. Without that same boost — and a few other minor adjustments, Amazon would have posted $2.07 billion in income for the quarter, or $4.14 a share — which still far exceeded analysts’ forecasts.
Aside from the earnings report, one of Amazon’s most controversial products is called Rekognition. It’s artificial intelligence software that runs on Amazon’s servers, and users pay the company for each image processed using the software. It can identify words, objects, emotions, and people. Police departments have already started using the software to find lost children and abducted people. But the technology’s power and low price have raised questions from civil rights advocates, including the American Civil Liberties Union, which warns that ubiquitous facial recognition software could infringe on people’s privacy and create a system of pervasive government surveillance. There’s apparently another issue with the software, too, according a new finding from ACLU: Sometimes, it’s not very accurate . The ACLU ran a test, spending $12.33 with Amazon Rekognition, and found that the facial recognition software incorrectly matched 28 out of the 533 members of Congress with mugshots of people who had been arrested. That’s a 5.2% error rate. Amazon defended its software in a statement, claiming, “While 80% confidence is an acceptable threshold for photos of hot dogs, chairs, animals, or other social media use cases, it wouldn’t be appropriate for identifying individuals with a reasonable level of certainty.” The Amazon software incorrectly identified some Congressional representatives as people who had been arrested for crimes. You have to admit, that’s an easy mistake.
Intel reported better than expected earning of $1.04 per share, excluding certain items, vs. 96 cents per share expected by analysts. Revenue of $16.9 billion topped estimates of $16.7 billion. Revenue for the quarter grew 15 percent year over year, which is up from the 9 percent growth a year ago. Intel’s biggest business segment, the Client Computing Group, came up with $8.7 billion in revenue in the second quarter, beating estimates. PC volumes were down 1 percent year over year even as the average selling price for desktop products rose 13 percent. The second-largest Intel segment, its Data Center Group, generated $5.5 billion in revenue, which is under the $5.6 billion consensus estimate – this appeared to rattle investors. And Intel’s Non-Volatile Memory Solutions Group had revenue totaling $1.08 billion, which is behind the $1.11 billion estimate. With respect to guidance, Intel said it expects $1.15 in earnings per share, on $18.1 billion in revenue in the third quarter. Analysts had expected $1.08 in earnings per share, on revenue of $17.60 billion for the period. Intel also raised its outlook for the full year. The outlook for Intel has been especially cloudy since CEO Brian Krzanich abruptly resigned in June, due to what the company said was an inappropriate past relationship with an employee. Despite beating on most metrics, Intel is down about 4.5% in after-hours trade.
Starbucks reported adjusted earnings of 62 cents per share, beating analysts’ estimates of 61 cents. Revenue for the quarter came in at $6.3 billion versus estimates for $6.2 billion. Comparable stores sales were up 1% in the U.S. and globally surpassing estimates of 0.8%. The company expects full-year global comp sales growth to be “just below the 3-5% targeted range.” Shares were up about 1% in the after-hours session. China has been an area of focus when it comes to growth for Starbucks. Net revenues for China/ Asia Pacific grew 46% year-over-year. The company opened 746 new stores in the last 12 months in the region.
Chipotle reported its second-quarter earnings fell to $46.9 million, or $1.68 a share, from $66.7 million, or $2.32 a share, a year earlier. However, revenue rose 8.3% to $1.27 billion and comparable restaurant sales grew 3.3%. The company raised its 2018 comparable restaurant sales growth outlook to low to mid-single digits from low-single digit previously. Avocados cost less, and diners spent more, but Chipotle had to spend more to get them into the stores. Chipotle shares rallied 6.5% after hours.
Airline stocks rallied. Southwest Airlines led the gainers after reporting better-than-expected per-share earnings for the second quarter, although revenue fell slightly short of estimates. The carrier said an accident involving a broken engine on an April flight from New York to Dallas that killed one passenger shaved about $100 million off revenue for the quarter. Southwest shares up over 8%.
American Airlines said it had net income of $566 million, or $1.22 a share, in the quarter, down from $864 million, or $1.75 a share, in the year-earlier period. Revenue rose to $11.6 billion from $11.2 billion. Passenger revenue per available seat mile (PRASM) grew in all geographic regions, led by a 6.2% increase in the Atlantic region. But higher fuel prices drove a 10.3% rise in operating costs. American Airlines up 5.5%.
Alaska Air, meanwhile, reported net income and revenue that topped estimates. Alaska Air gained 9.5%. Despite today’s rally, the airline stocks have had an awful year. Not counting today’s results, Alaska Air shares have fallen 13% in 2018, while American Airlines stock has fallen 23% and Southwest was down 14%.
Some quick economic data: Initial jobless claims climbed by 9,000 to 217,000 in the week ended July 21, one week after hitting a 48-year low. The number of people already collecting unemployment benefits, known as continuing claims, fell by 8,000 to 1.75 million.
Durable-goods orders rose 1% in June, the first increase in three months. However, the gain was below expectations. Transportation equipment orders led the increase, rising 2.2% in June. Civilian aircraft orders rose 4.3% in June after an 11.6% drop in May.
Tomorrow morning the Commerce Department releases second-quarter GDP data. Estimates call for 4.2% growth, which would be the best quarter since the third quarter of 2014.