Faceplant; Russia
Shares of Facebook plummeted this past Thursday after they posted mixed earnings results after the close of the market on Wednesday and provided relatively weak forward guidance. Second quarter earnings came in at $1.74 per diluted share up nearly 32% from $1.32 per diluted share one year ago and above the consensus estimate of $1.72 per diluted share. Revenue for the quarter was $13.231 billion, up nearly 42% from $9.321 billion one year prior but slightly below the consensus estimate of $13.360 billion.
Of note was the fact that daily average users (DAU) in North America remained relatively flat at 185 million during the second quarter while those in Europe dipped slightly to 279.0 million from 279.4 million. DAUs as well as MAUs have risen by approximately 11% over the past twelve months. Those familiar with Facebook attribute the decline in DAU’s to the recent scandal regarding Cambridge Analytics. Of note is the fact that there were 2.23 billion Monthly Average Users (MAU) at the end of the second quarter. Excluding China where Facebook does not do business, that is approximately one-third of the population on Earth.
The stock sold off slightly after the earnings report but accelerated that decline during the conference call as Chief Financial Officer David Wehner noted that shareholders can expect “revenue growth rates to decline by high singledigit percentages from prior quarter” for the remainder of the year.
Other issues that may compress margins going forward is the fact that Facebook has had to hire hundreds of employees to make their platform more secure, is attempting to monetize Instagram and WhatsApp, and is wrestling with the newly enacted General Data Protection Regulation in Europe.
We believe that Facebook is an attractive stock to purchase at these levels and would look to do so after the dust settles probably around the beginning of next week.
Russia’s military might, including their arsenal of nuclear weaponry is arguably the only thing that gives them any relevance on the world stage. Consider these facts – as of 2016, the population of Russia was approximately 144.3 million while the population of the United States was 323.4 million. However, total GDP for Russia during that year was $1.283 trillion while the GDP of the United States was $18.570 trillion or more than 14 times that of Russia with only 2.24 times the population. U.S. GDP per capita was $57,421 while Russia’s was $8,891.
Now consider Canada. In 2016, their population stood at approximately 36 million or one-quarter that of Russia. However, their 2016 GDP was $1.53 trillion, nearly 20% greater than that of Russia. Canadian GDP per capita was $42,157 in 2016.
If one were to take a look at projected global GDP, Russia would rank 11th, behind Canada (10), Brazil (9), Italy (8), India (7), France (6), the United Kingdom (5), Germany (4), Japan (3), China (2) and the United States (1).
Circling back, let us not understate the importance of Russia’s military might or the fact that the country is so vast as to cover eleven time zones. However, economic sanctions led by the United States in response to the annexation of the Crimean peninsula from the Ukraine has damaged the Russian economy. In our opinion, and as he stated Wednesday during a joint post-meeting press conference with European Commission President Jean-Claude Juncker, President Trump is wise to continue working at eliminating trade barriers thereby encouraging trade with our traditional partners, including Canada, the United Kingdom and the members of the European Union.
In today’s environment with the advent of social media along with “editorialized” news, it is no wonder that many investors are skittish. It is for this reason that we spend a substantial amount of time on helping our clients deal with the behavioral side of investing, specifically the concept of loss aversion. Consider this fact. Despite the nearly nine percent average annual return of the stock market over the past fifty years, stocks decline nearly as many days as it advances. It is with this in mind that investors must be cognizant of the fact that, according to behavioraleconomics.com, “the pain of losing is psychologi- cally about twice as powerful as the pleasure of gaining,” a theory first put forth by Kahneman & Tversky in 1979. It is no wonder that, without a disciplined approach to investing, it is difficult to be successful.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.