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Facebook on Pace for Biggest Loss Ever After Disastrous Earnings Call

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Shares of Facebook Inc. (FB) are reporting eye-popping losses Thursday after the social media giant’s second-quarter earnings call raised red flags about its moneymaking prowess.

Facebook Earnings Call Rattles Investors

Concerns about revenue growth, monetizing Instagram and the impact of new privacy laws have rattled investor confidence in Facebook. Those fears took all but 20 minutes to materialize Wednesday afternoon in an earnings call that failed to allay investors’ concern over a litany of issues facing the company.

For starters, Chief Financial Officer Dave Wehner said advertising revenue was down more in Europe than any other region partly because of new privacy legislation that came into effect in May.

Wehner’s second bombshell was that overall revenue growth wasn’t just slowing in the second quarter but would continue to do so for the remainder of the year. Exchange-rate risks, new privacy options and disappointing ad revenues for Instagram Stories were largely to blame.

The company also confirmed weak user trends in some of its core markets, including the U.S. and Canada. Daily active users in both countries came in at 185 million, virtually unchanged from the previous quarter. Daily users in Europe fell to 279 million from 282 million in the previous quarter.

Of course, on paper, Facebook’s earnings results appear stellar. For the quarter, per-share earnings jumped 32% to $1.72 on revenues of $13.23 billion. However, analysts had forecast revenues of $13.36 billion. The last time Facebook missed analysts estimates for revenue was in Q1 2015.

Wrong Type of History

As Business Insider reports, Facebook’s Thursday open puts the social media giant on track for the worst single-day loss in stock-market history. Share prices plunged a whopping 19%, erasing $115 billion in market capitalization.

The bloodbath began after hours with share prices plunging as much as 24%. Facebook traded as low as $174.78 a share on Thursday.

Facebook’s precipitous drop is likely to drag other tech shares along for the ride. Apple Inc. (AAPL), Amazon (AMZN) and Netflix (NFLX) were all down more than 1.5% overnight. The Nasdaq Composite Index opened firmly in the red on Thursday and was down by as much as 1.2% in regular hours.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 770 rated postsChief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi




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Analysis

Traders Buying Activision Blizzard Options

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the S&P 500 having recovered most of its Christmas losses, there are still stocks that have not even started to move away from their lows. Today we are going to analyze one of those.

Activision Blizzard (NASDAQ: ATVI) is a US based company that produces and sells game consoles, PC and mobile gaming content. Headquartered in Santa Monica, CA, ATVI is one of the largest gaming and entertainment companies in the world. It was founded in 2008 after the Vivendi Games and Activision merger, and currently owns such brands as Call of Duty, Quake, and World of Warcraft, among others.

In the last 6 months of 2018 ATVI experienced its most negative period in history, having lost around 50%.

Fundamentally, this was sudden, as all quarterly reports exceeded expectations.

The chart shows revenue went down in early 2018, but this is okay given the seasonal factor, and Q4 is sure to yield nice profits to ATVI.

With the reports being so good, then, what made the stock plunge so much? First, the market went down overall, but there were some other reasons, too. One of them is the lower expectations on Q4 2018 earnings. They were first forecast at $3.06B, but in November, the company lowered them down to $3.04. Another reason was the news of fewer users in Q3.

Then, four top managers got fired, including the CEO and president, as they were unable to create a new game during 2018; this was followed by Michael Morhaime, the former Blizzard CEO, leaving the company. He stopped being president in October and became an adviser, but he will definitely have left by April 2019.

Done with firing? Not really. In February, someone let slip the company is getting ready for a massive job cut, firing over 100 employees, in order to reduce costs.

Breaking off with Bungie added fuel to the fire, with the stock plunging by 7%. Activision Blizzard and Bungie worked together on Destiny, but this did not prove fruitful. In November, Activision Blizzard provided Destiny 2 for free just to ramp up the number of users, which means the sales were not very good. At Bungie, however, people reacted positively, as they were very happy to get rid of the strict Activision Blizzard schedule.

For ATVI, however, this not only caused the stock to plunge, it may have also led to trials initiated by investors. A few companies are already considering legal action because of the loss of potential profits. All these negative reasons are still keeping the stock near its lows. The reasons are already priced in the market, though, as the news on legal actions were known in January, while the firing campaign may be good for the company.

In December, we mentioned General Motors (NYSE: GM), where the management decided to cut jobs, and the stock went finally up, forming an uptrend.

Once Activision Blizzard is able to reduce costs, this may happen to this company as well. The market is expecting a positive Q4 report, which may change investor sentiment, which is now negative.

The P/E is currently at 17.54, with the average being 18.91, which means the stock does have some potential.

With such a large stock fall, the short float is quite low, 2.23%, meaning there are few people who want to capitalize on the fall.

Another important factor that may signal a rise is the news on buying 16,000 call options at $46, with the expiry on Feb 15. Traders have to pay a premium in order to buy options, and the price must rise above the strike ($46 in this case) for them to get profits; this means the price is very much expected to rise above $46 by Friday.

Technically, there is a descending trend, with the price being below the 200-day SMA. Once the price approaches $45, however, the volumes go up, which shows the traders’ interest.

A good report may well push the stock above $50, but the price should stay there for a while before one could start taking midterm longs. The target may be at around $65 or $70.

Those who bought calls hoped for a good report, but the options will expire in a couple of days (or sooner), and this support will come to an end. In order to understand whether one should continue holding longs on ATVI, one should monitor the number of new users and management speeches. The rising number of users may change the current negative trend, and, in this case, even the legal actions won’t be a big deal.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 30 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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Netflix’s Unstoppable Economics

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Right now, we are seeing the next stage of the evolution of Netflix, as it hits an escape velocity that seems to make it the perfect replacement for much of its competition. They recently announced a $2 price increase, and it is not expected to hurt the companies revenues in the least.

It seems like everybody in Silicon Valley is always talking about “network effects” and how all the best companies have them. For those of you who don’t know, network effects refer to the decreasing effort required to get each additional user for a service. Another way of putting it is: people are attracted to what’s popular.

Netflix does benefit from these effects, but also utilizes a model that has much more complex implications. It is able to win over supply at a lower cost because of the large number of expected viewers. This is similar to network effects, but applied to the supply-side.

Supply-Side Domination

One solid indicator of Netflix’s juggernaut capabilities is the success of Bird Box. Released in early January, the movie is reported to have been watched in 80 million households. Although these users technically got the movie “free”, unlike if they’d gone to a movie theatre, the implications are still very powerful.

With one single movie, Netflix is able to entertain current customers, win over new customers, and retain existing customers that might have been considering leaving. All that is to say, the product is the marketing. So as more suppliers come to the platform, there is a perpetual cycle of more customers being drawn there by the “inventory”.

And there are several big reasons why suppliers are starting to find Netflix more appealing. First, they are available worldwide, which gives them greater purchasing power to work with. And this purchasing power is further increased by Netflix’s projected growth. Unlike a movie theater, the product is going to be available to all future users as well. Finally, much like how biotech companies have tons of projects underway at once so they can benefit from the risk distribution, Netflix has many projects vying for the attention of users. This means that no movie or TV show is monetized in isolation. Therefore, the upside potential is big (Bird Box), but there is lower downside when a flop occurs. This risk profile further increases Netflix’s purchasing power.

The Price Increase

Perhaps this is why Netflix is confident in their ability to increase the price of their subscription service. Analysts expect the user growth to slow down a bit, but the increase in customer value to compensate for that. As Netflix reaches some level of saturation in markets like the U.S.A., it becomes harder to go after the marginal customer, and instead makes sense to increase customer value. If this allows them to syndicate more content, the growth will compound in the long-term.

The final point to make is that Netflix customers are very price elastic. Paying $15/month for a service that essentially replaces cable and many other entertainment needs is seen as a bargain. As the value of the platform continues to increase, users have no dispute with paying more.

The conclusion is that subscribers are given more content and suppliers are paid more for their work. Netflix gets to sit in the middle and increase their revenue, which makes it a great long-term buy based on this economic model.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Op-Ed

A Reframe on Amazon’s Poor Guidance

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Right now, we are hearing about how, Amazon, has announced lower-than-expected sales guidance. Many are projecting this to mean a down period for Amazon as new costs creep up on them and growth in AWS (Amazon Web Services) slow. I would argue that this creates a wonderful opportunity for anyone willing to thing in the long-term.

For the past year, Amazon has been flirting with the title of “most valuable company in the world”, with Apple being the competition. The companies run neck and neck, and with this poorer guidance, they are essentially tied at around $800 billion right now. It should be noted that the last quarter’s earnings were actually above expectations. However, the future projections always seem to carry the most weight.

Amazon’s Confusing Structure

What people tend to forget about Amazon is that it is the most difficult company of all the FAANG stocks to comprehend. What other company has been able to dominate is so many different businesses that seem unrelated, yet are able to find strong synergies? Amazon is a media company, has a loyalty program, dominates the cloud space, encapsulates all e-commerce in the West, and is the juggernaut of voice in our culture. In just a few years, Alexa has become a fixture in our lives and has overtaken Siri as the de facto “AI” in our lives.

So forgive me if I don’t want to go against Amazon. Instead, I would treat any short-term negative news as the buying opportunity of a lifetime. Amazon is geared up to grow their media presence significantly, and has the chance to be a dominating force in that industry as well. And with the iPhone ceding technological leadership to the Amazon Echo (and having numerous complementary uses for Amazon), the next few years are likely to be very bright for the company.

What makes Amazon so difficult to value is the wide range of businesses present within it. For example, it is an e-commerce company at its core. But it also has one of the largest loyalty programs in the world (Prime). AWS was started as a utility for the company and is now a massive cash cow. The complexity is both the greatest part and the biggest risk to the company.

I say greatest risk, because anti-trust lawsuits and and investigations are the most likely threat to the company in the next few years. Its current method of operation seems to be tacitly approved, but the wide range of businesses operating under one name will eventually be perceived to violate the competitive landscape of the States. The question is: can this be preempted by spinning off AWS, or is it a waiting game?

Not to Be Underestimated

Years ago, I remember pundits talking about how Amazon was overpriced and its insane multiple was unjustifiable based on profits and where the company was going. Those people were clearly wrong, but the chance to buy in hasn’t disappeared. Little drops like this should be taken for what they are: short-term thinking being applied to one of the most strategic firms of all time.

There are no real long-term competitive threats to Amazon that bear credible brunt. Assuming CEO Jeff Bezos’ divorce doesn’t result in the destruction of the company, all should be fine. But that is a whole other discussion in itself.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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