The Market Ticker
Commentary on The Capital Markets- Category [Earnings]

This is arguably the most-amusing after-hours move I've seen in a couple of years.

LinkedIn spiked way up on its earnings release, burying anyone who was short (no, not I) with more than $30 move in seconds (about 15%.)

That has all now come back off as it appears the "beat" was financial engineering.


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2015-07-29 08:42 by Karl Denninger
in Earnings , 126 references

If you believe "social media" has a financial future you're delusional.

Twitter had one of the few honest conference calls I've heard in the space.  Unlike Facebook, which sells itself to investors on the premise that you will generate (as a user) some $25.00 per person in ad revenue for the company, Twitter is more-honest about what they are -- and the stock got hammered.

Think about the Facebook premise as they get ready to report tonight.  The premise is that every man, woman, child and dog on Facebook will generate about $25 per person in ad revenue, per year, forever.  Then remember that the US market is saturated and thus their "growth" is now coming from other nations where per-capita GDP is much smaller than it is here.

First off, I don't buy for a second that even the average US user, when one considers the fact that a hell of a lot of both very young and very old people are on Facebook, neither group of which responds well if at all to online ads, generates $25/year in ad revenue.  But even if you accept that there is no possible way for the average user in other nations to generate that sort of revenue.

That entire premise is a crock for one simple reason: For a user to generate that much revenue you must buy several times that much as a consequence of that advertising or it's a bad buy from the advertiser's point of view.  The reason for this is simple -- nobody has a 100% profit margin and it is out of the gross profit on sales that advertising is paid for.

It may take quite some time for advertisers to figure this out but eventually they will -- and when that happens the price Facebook can charge for ads will drop through the floor, destroying the firm's revenue model.

And that, my friends, is a fact.

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From the filing...

Net sales increased 20% to $23.18 billion in the second quarter, compared with $19.34 billion in second quarter 2014. Excluding the $1.39 billion unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 27% compared to second quarter 2014.

Operating income was $464 million in the second quarter, compared with operating loss of $15 million in second quarter 2014.

Net income was $92 million in the second quarter, or $0.19 per diluted share, compared with net loss of $126 million, or $0.27 per diluted share, in second quarter 2014.

In other words: The company sold $23,180 million worth of "stuff" (goods and services) and earned a profit of $92 million on that.  To put it in percentage terms they earned a profit of 0.40%.

Yes, four tenths of one percent profit.

The firm's cash position did not materially change either.

The company continues to acquire a lot of property under capital leases, which is not necessarily bad, but it does hide the amount of spending that's imputed there (since it's financed instead of being spent and depreciated.)  This is not necessarily bad either, but one does have to pay attention to the fact that a leased piece of gear goes "poof" when the lease terminates (unless you buy it at the residual value.)

Of note is that International continues to lose money and is losing it at roughly 3x the rate it was last year.  This is important if you believe the China -- and general international -- story has legs (that is, their economies are weakning.)  Amazon is not just a US firm; fully one third of their good and service sales are outside North America.

AWS' numbers actually look nice provided that they didn't stop temporarily buying hardware to "goose" the numbers in this quarter.  That will show up fast (like the next two quarters) if they did; you can't hide that for long.  I'm skeptical on AWS results being clean simply due to the competitive landscape. 

International results are interesting too; the company would have you believe that a 22% growth rate internationally turned into a 3% one due to FX in the last quarter.

Then there is that PPE under capital leases -- it's up faster than operating cash flow is.

But that's not the 900lb gorilla in the room.  No, it's the idea that a company with a net profit of half of one percent sells at 168x forward estimates and, if you annualize that nice 19 cents for three quarters and give them a buck in earnings for the holiday quarter (rather generous, based on history) you still wind up with a stock selling, at this point, at some 358x earnings and which is now a larger company on a market value basis than WalMart.

Sold to you.

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He he he he.....

No, it's not just Apple.  Microsoft got hammered as well, albeit on the Nokia writedown.

The problem at Apple is deceleration in "growth" in the iPhone; Apple is a one-trick pony in terms of its valuation and reason to exist.

This is a clean illustration of the stupidity that underlies our so-called "markets"; "growth" on a perpetual economic basis is impossible because we live on a finite-sized planet of finite mass and size.

All "growth" stories have a terminus yet everyone models perpetual growth at ridiculous rates.  It can't happen, mathematically.  It never can happen no matter what the subject firm or event is.  Projecting such a thing is always and everywhere a fraud, yet it forms the basis of our so-called "market"; you never see any of these "analysts" put a terminal date on their "story", yet all such "stories" have one.

Apple has ridden since the original iPhone on the "halo effect" of a "growth" mantra that is physically impossible, riding it to a market cap and cash position that is utterly ridiculous.  The so-called "investor" in these issues is nothing more than a tulip-bulb speculator.

I've had a handful of emails asking me to "comment" on Apple's quarter specifically.  My comment is simple: The "cold sweat" middle of the night awakening may be starting with this and other issues that have run into this funny thing that you choose to ignore.

It's called "Algebra."

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Sure, if you just read the headlines.

Look at the tax rate.

Then for confirmation look at operating income.

 I suggest a belt of some strong scotch before you do either, given the market's "reaction" to their earnings announcement.

'Nuff said.

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