When a $5 Billion Loss Brings a $50 Billion Gain: Taking Stock
(Bloomberg) -- Only in Tech-Landia.
Staggering dollar sums are the norm. Three companies heavily geared towards the technology space -- Amazon.com, Apple and Microsoft -- are poised to attack the $1 trillion dollar mark in market valuation. And that figure numbs you to the “small” players. Like Facebook (worth “only” ~$520 billion in market value as of Wednesday’s close).
And what happens when a player of that size estimates taking up to a $5 billion charge related to its legal entanglement with the FTC (you know, the size of an H&R Block, or Barbie parent Mattel Inc.)? Well, shares rise 9 percent, naturally, adding more than $50 billion in market value off the back of earnings that broadly exceeded other metrics, including revenue (you know, just the entire size of Marriott International, or Northrop Grumman, or Walgreens). Bloomberg Intelligence’s Jitendra Waral noted that even if that high estimate of $5 billion is reached, Facebook’s core business would not be disrupted. For comparison, Facebook’s net income for the prior 6 quarters had averaged around $5 billion or so.
Also for comparison, and narrative’s sake, a lot of focus tends to center around banks and the settlements they’ve been encouraged to enter. Like the bank regulators love to hate (OK that may not be entirely true), Wells Fargo, which was hit with a $1 billion fine related to some of its misconduct in 2018, and the additional $2.7 billion set aside to handle issues this year. And by comparison, the Goldman Sachs 1MDB scandal is estimated to be settled with U.S. authorities for approximately $2 billion, according to Bloomberg Intelligence analysts. Goldman’s shares took a full 1% hit intraday Wednesday alone (amounting to ~$780 million in lost value) on reports the DOJ was asking for a guilty plea in that investigation. And Goldman and Wells have suffered of late, down 17% and 10% respectively over the past 12 months, much of which can be likely attributed to these regulatory overhangs and settlement threats.
But not big tech. Another element to consider in the rise in Facebook shares is the degree to which the shorts were getting burned. Facebook was the second largest short in the Interactive Media and Services Sector, behind Alphabet, according to financial analytics firm S3 Partners, and that was after covering nearly half their shorts this year alone. The Street is now throwing caution to the wind, with whatever few non-bulls out there now joining in support (the social media giant has just two sell ratings in the stable of 50 analysts, according to data compiled by Bloomberg). UBS raised their rating to buy, citing Instagram’s “outsized” user engagement and revenue growth, while overweight-rated Keybanc writes that cost growth will likely moderate beyond 2019. Citi raised its price target nearly 15%, citing stabilizing margins and “strong” top-line figures.
The QQQs are up 0.7%, with extra help from Microsoft which, if it opened where its currently trading, up 5 percent, would exceed $1 trillion in market value. And in other non-tech developments, S&P futures took a slight dip after MMM cut its forecasts, dropping nearly 8% in the pre-market.
What 5G giveth, it can taketh away. Xilinx, considered a player in the future of 5G investment, has seen its shares run up 64% this year, prompted by the anticipation of growth in its communications segment and results in January. But after setting fresh all-time highs Wednesday, it appears that very same growth was behind the 8% dump in shares here in the pre-market. A gross margin outlook miss appears to be behind some of that decline, and the business unit associated with lower gross margins (vs other areas of the business), communications (5G), may have been responsible as it became a larger share of overall revenue (41% vs 35% last quarter) despite growing 74% y/y.
Its fascinating, as 5G was the very reason for another name, Teradyne, to soar to within 5% of its all-time highs Wednesday. Teradyne attributed some of its solid performance to pockets of strength in 5G. Even with the decline in Xilinx, its valuation will still likely remain well above its 5 year historical averages. Its blended forward EV/EBITDA ratio as of Wednesday’s close was 28x, vs its 5 year average of 16.7x, according to data compiled by Bloomberg. Goldman Sachs, in a downgrade after the results, highlights that for XLNX, the “long-term thesis intact but valuation now full.”
Other key players in the space include Marvell Technology, which UBS wrote earlier this week was gaining “basestation share.” The analysts see a “5G wave” on its way with another $1 billion in revenue from the technology beginning in 2020. Texas Instruments also benefited Wednesday off the back of 5G -- Citi attributed the sales beat to “5G-related strength from the Communications end market.”
Fundamentally though, its a secular play, and one needs to have confidence about whether the trends continue. Keybanc analysts wrote that "we remain buyers" of XLNX despite the gross margin miss given the expectation for it to normalize. John Vinh notes that XLNX is “one of the best positioned 5G plays.” Watch for volatility in the chip space broadly, including Cypress Semi and Microchip Tech, and interestingly for Europe, Nokia is already lower after taking a loss related to the race there to supply fifth-generation network gear at competitive prices.
Sectors in Focus Today
- Dental names (HSIC, XRAY, PDCO) after Align Technology, maker of the "Invisalign" product line, beat expectations
- U.S. banking names after reports that the Volcker rule may be revamped, replacing an accounting portion with an easier test, which may be be a win for banks
- Trucking names after Landstar results missed expectations for its 2Q. This comes after Knight-Swift rose more than 3% with its results earlier Wednesday. Old Dominion Freight followed the latter, as it beat on the top and bottom line. Werner is due is post-market
- Semiconductor manufacturing names as Entegris reports results, which beat on 1Q but was weaker in its 2Q forecasts; this follows Lam Research and Teradyne, which both exceeded expectations in their reports in the past couple days. Goldman called Lam Research’s execution “strong” in a “challenging” backdrop for wafer fab equipment (WFE)
- Homebuilders as DR Horton and Tri Pointe disclose results. Peer PulteGroup has risen more than 5% since its earnings beat earlier in the week
- European bank ADRs after a series of bombshell reports (Deutsche Bank-Commerzbank merger talks said to have ended, RBS CEO will leave the role within the year, and UBS’s earnings came in “better than feared”)
Notes From the Sell Side
American Express was lifted to overweight from equal-weight at Morgan Stanley, which wrote that it now viewed “robust revenue growth as sustainable,” adding that the company had “one of the fastest EPS growth stories in our coverage universe.” Analyst Betsy Graseck sees three near-term catalysts, including an expected rebound in spending volumes in the second quarter, a smaller foreign-exchange headwind, and upward revisions to earnings estimates. Shares of the Dow component are up 0.8% before the bell.
JPMorgan closed out its underweight rating on General Dynamics, upgrading the stock to neutral following a lengthy period of underperformance relative to the broader market. It now sees “moderate upside,” a “reasonable valuation, and fewer obstacles ahead.” Analyst Seth Seifman wrote that long-term profitability challenges at GD’s Aero division – along with “strategic and financial challenges” at General Dynamics Information Technology – were now “better understood, making for a more favorable balance of risk.” The firm considered an overweight rating, it added, “but didn’t see the upside.” It has a price target of $200 on the stock, up from $188.
Tick-By-Tick to Today’s Actionable Events
- 7:30am -- ABBV earnings
- 8:00am -- FCX earnings
- 8:30am -- CMCSA, UPS, DHI earnings call; Fed holds first public meeting on BB&T/SunTrust deal in Charlotte
- 8:30am -- March Prelim. Durable Goods Orders
- 8:30am -- Weekly Initial Jobless Claims, Continuing Claims
- 8:30am -- March Prelim. Cap Goods Orders
- 9:00am -- ABBV, MO earnings call
- 9:15am -- F earnings
- 9:45am -- Weekly Bloomberg Consumer Comfort
- 10:00am -- FCX earnings call
- 10:30am -- BMY earnings call
- 11:00am -- April Kansas City Fed Mfg Activity
- 12:30pm -- LUV earnings call
- 4:01pm -- AMZN earnings
- 4:05pm -- INTC, MAT, SBUX earnings
- 5:00pm -- AEM CN earnings; INTC, MAT, SBUX earnings call
- 5:30pm -- F, AMZN earnings call
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