This Week’s Headline-Making Stocks: A Tale of Two Equities
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fourth week of trading for 2013 is now in the books and bears are nowhere to be found. It seems they’ve all moved to Cupertino. If that doesn’t make sense yet, don’t worry, it will. This month it’s been the running of the bulls as all the major indexes are within striking distance of all-time highs.
Investors want to know if it will continue. But seeing as strong corporate earnings have arrived so far, I don’t see why it can’t. Besides, the bear catalysts such as the housing and labor markets have exceeded expectations. Even more remarkable, politicians appear to now be playing well together.
Essentially, the stars are lining up for a prolonged run in equities. The question though, should not be whether or not this run can continue, but rather when is it wise to cash out? For many stocks, this question has already been answered this week. For others, it's a problem that every long position wants to have.
As we have done since the beginning of the year, let’s take a moment to reflect back on this past week’s headlines. While a few companies erased uncertainties, others incited doubt. This week’s theme however, was a tale of two equities – Apple’s new 52-week lows and Netflix’s new 52-week highs. Who would have thought?
Apple (NASDAQ: AAPL) – Down 12% for the week
For the week, the stock nosedived 12%. Unlike the previous two weeks, this time there were no seesaw fights with the shares. The bears took over (hence, my reference above to the company's home in Cupertino). But was it justified? It was all based on Apple’s Q1 results, which in my opinion were pretty good -- but not enough to please the Street.
Apple posted revenues of $54.5 billion, which was in line with Street estimates, but possibly softer depending on which data point used -- consensus was $54.58 billion. But Apple beat EPS estimates – posting $13.81 versus $13.34 per share. The major concern however was the softer than expected sales of iPhone.
Apple posted 47.8 million iPhones. Again, this wasn’t enough. Never mind that it represented 30% unit growth year-over-year. Buy side analysts were looking for 50 million. Too, investors overlooked the fact that this fiscal Q1 had one fewer week (13) than last year. This makes a huge difference in sales performance. Next, the company asked the Street to be more realistic in their expectations.
Apple was essentially saying that the “game” is over. And I say “game” to reference the disconnect that existed between the company’s outlook and analysts’ projections. To that end, Apple said it will change how it issues guidance – saying going forward, guidance will be more realistic and not the “low-ball” variety that Apple has been known to provide.
In other words, a more mature Apple is on the horizon. While this often means slowing growth, I’m not yet ready to make this claim. Nonetheless, margin compression is real and the competition is gaining ground. Apple needs a new product to prove it can still innovate. While the stock is cheap at $439, timing the bottom presents another challenge. But with $137 billion in cash, there’s no risk.
Netflix (NASDAQ: NFLX) – Up 70% for the week
If smart money found Apple sour, they certainly bought admission tickets to Netflix this week as the stock gained 70%. Shares started the week at $99.17 and by Friday Netflix had made a new 52-week high reaching $172.68 to then settle at $169.56. The reason – a surprise Q4 profit when the Street expected a loss.
Interestingly, Netflix said that profitability was helped by increased mobile device sales during the quarter from (among others) Apple as more users downloaded its streaming app. Ahead of the report, the Street expected a 13 cent per share loss on revenues of $935 million. This would reverse a profit of $35.2 million, or 64 cents per share, which the company earned last year.
Everybody got it wrong. Netflix stunned the Street with a profit of 13 cents per share and beat its revenue number by posting $945 million, representing 8% growth year-over-year. The company continues to grow subscribers at an impressive rate – adding 2.05 million domestic streaming subscribers plus 1.81 million outside the U.S.
Likewise, there were across the board improvement in margins. While expenses have been a popular bear argument, Netflix managed to make meaningful improvements in costs as general expenses declined by 30%. Too, there were only modest increases in other areas such as marketing expenses and technology costs, which rose 2.7% and 1.7%, respectively.
Overall, this was a impressive quarter. And investors are beginning to appreciate the capabilities of Netflix after the company was essentially left for dead at $52 per share. The major winner however was Carl Icahn, whom I’ve described as the smartest guy in the room after taking a 10% stake in Netflix back in November at $58 per share. His $321 million investment is now worth well over $1.2 billion in just two months. As they say, investing is all about timing – and information…
Google (NASDAQ: GOOG) – Up 7% for the week
I’ve been critical of Google and recently called its ambitions “scattered.” While I’m not ready to back away from this statement, I’m ready to offer the company an apology after another solid quarter, during which the company beat Street estimates as profits jumping 6.6% year-over-year to $2.89 billion.
There were doubts ahead of the report as to how the analysts would view the report. Google issued a memo advising how its earnings would be impacted by the sale of the Motorola home business to Arris. Nevertheless, the tech giant rewarded investors with consolidated revenues rising 36% year-over-year to $14.42 billion – beating analysts’ estimates of $12.34 billion.
Remarkably, revenue surged despite a drop in average cost per click, which tracks how much money advertisers pay Google for ads. As noted, this was an area of concern for analysts as reports surfaced several weeks ago that Facebook had gained meaningful traction with advertisers, particularly with mobile.
This continues to be an issue since it marked the fifth consecutive quarter during which the cost-per-clicks dropped – despite the 2% sequential gain. Still, this was not enough to thwart investor confidence. And the revenue growth coupled with Apple’s earnings miss proves that Google’s rising expenses are justified – although it’s been a popular bear argument.
The company is now operating on all cylinders. Plus, with the Motorola situation now being resolved, Google’s future remains as bright as ever. With shares trading at $753, the stock is a sure bet to hit $800 to $850 by the second half of this year.
Sirius XM (NASDAQ: SIRI) – Down 0.3% for the week
Last week, Liberty Media made it official that it acquired the necessary amount of shares needed to become majority owners of the satellite radio giant – pushing its ownership stake to 50.5%. While this bit of uncertainly has been removed, there is still the expected Reverse Morris Trust (RMT) that is expected to follow. The only question is when.
As Sirius is due to announce results for its fourth quarter a week from tomorrow, Liberty Media wasted no time showing its intentions. This week, the company appointed three new members to Sirius’ board of directors. Joining the group will be Charles Tanabe, Liberty Media’s former general counsel, and Liberty executive vice presidents Mark Carleton and Robin Pringle.
These new members will replace Leon Black, Lawrence Gilberti and Jack Shaw. Things are beginning to fall into place. In the meantime, at $3.15 per share there is still yet plenty of value in Sirius’ stock. As noted, the company will announce Q4 earnings soon and the company offered the following outlook for 2013.
- Revenue of over $3.7 billion
- Adjusted EBITDA of over $1.1 billion
- Free cash flow approaching $900 million
- Self-pay net subscriber additions of approximately 1.6 million
- Total net subscriber additions of approximately 1.4 million
These are easy targets to reach. I would be a buyer here ahead of the report. For that matter, it is not farfetched for shares to reach $3.50 following what is expected to be a very exciting announcement.
Research In Motion (NASDAQ: BBRY) – Up 10.7% for the week
Shares of RIM were up sharply for the week, which continues an impressive 170% run in the stock since reaching bottom at $6.50 per share in September. While there is plenty of optimism that shares can sustain this momentum, there is also the fear of a strong pullback.
Nonetheless, two prominent analysts (RBC Capital and Jefferies) have come to offer continued support of the stock – both raising price targets on RIM to $19. Both have cited strong enthusiasm for RIM's decision to allow its BlackBerry email service to run on Apple’s IOS and Google's Android devices. As to the notion that RIM would continue to shed subscribers, Jefferies said it’s overblown.
Meanwhile, this coming week (Jan. 30), RIM will unveil its highly anticipated BB10 operating system. This new version is expected to offer greater functionality and is expected to help RIM compete more effectively with Apple and Google. The concern however is the potential for a “sell the news” type of event.
While the optimism about RIM’s future is justified, holding the shares after a run of 170% in four months doesn’t make sense to me. While RIM’s fundamentals are indeed improving and the stock may do well long term, in the near term a 30% to 40% pullback may not be the worst thing in the world. But why not lock in profits? As they say, if you’re not willing to leave money on the table, you’re not making any money either.
rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Netflix. The Motley Fool owns shares of Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!