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Technology Round Up - February 5, 2013
There have been many noteworthy developments in the technology space recently. Some of these will likely have a material impact on the companies in the sector and the markets they serve.
Facebook’s Big Announcements
Social networking provider Facebook (FB) recently unveiled a new service called Graph Search. It will be introduced slowly, initially available to a limited number of domestic users. Graph Search will allow users to search across different friends’ timelines without having to visit each individual profile to discover who likes a specific item. This will make a searchable database out of the personal information that people have shared on Facebook’s flagship Web site. Graph Search is privacy aware, and most content is not public. Thus, users can only search for content that has been shared with them.
Allowing users to make detailed search queries may be viewed as a challenge to Internet search giant Google (GOOG). However, Graph Search is much different from Web search, so we don’t think it will be a threat to Google’s leading position in search in the foreseeable future. A successful push into the search arena could boost growth at Facebook in the coming years, but we should emphasize that this endeavor remains in the early stages.
The company has also reported fourth-quarter results recently. Facebook posted revenue of $1.585 billion, an advance of 40% from the prior-year period. Monthly active users of 1.06 billion increased 25%, on a year-over-year basis. Mobile monthly active users of 680 million jumped 57% from the year-earlier. Mobile revenue comprised about 23% of advertising revenue for the fourth quarter. Earnings per share came in at $0.03, which was a nice improvement from the second and third quarters, but fell short of our expectations.
Investors appear concerned about the likelihood of higher costs in the current year. The company plans to increase spending on a number of initiatives going forward. This includes improving the mobile experience for users. Facebook will continue to increase its headcount, particularly in product development. This ought to cause expenses to grow at a faster rate than revenues, pressuring margins.
Netflix Strikes Back
Shares of Netflix (NFLX) have traded sharply higher following the company’s fourth-quarter earnings release. The top line advanced moderately, to $945.2 million. Share net of $0.13 was well short of the prior-year tally, but easily exceeded consensus, and our own, expectations. Domestic streaming subscriptions increased to 27.15 million in the fourth quarter (up 8% sequentially and 25% from the prior-year period). The number of international customers increased by over 40% during the quarter, to 6.1 million.
Netflix will probably continue to experience strong growth in domestic streaming customers and expansion on the international front. However, costs associated with overseas expansion should restrain the bottom line in the short run. The company is using profits from its domestic operations to fund international expansion and to create its own original programming. Such initiatives will likely pay off down the road, but in the short run, share earnings will probably remain below the levels reached from 2009 to 2011.
Google’s Solid Performance
Google has turned in favorable results for the fourth quarter. The top line came in at $14.42 billion, an increase of greater than 35% from the prior-year period. Share net of $8.68 was a moderate improvement, on a year-over-year basis. Moreover, recent results suggest that the company will be able to successfully monetize mobile advertisements. This issue should be increasingly important going forward, as paid ads continue to shift away from traditional platforms in favor of mobile devices. Investors cheered the recent earnings news, and the stock is now trading near an all-time high.
Apple Posts Mixed Results
Apple (AAPL) reported a mixed performance for the December period. Revenues of $54.5 million advanced at a moderate clip, in spite of disappointing Mac sales. The iPhone performed pretty well. Despite supply constraints, the iPhone’s 47.8 million units shipped represented an increase of 29%, year-over-year. Share earnings of $13.81 came in slightly higher than consensus expectations, but were slightly lower than the prior-year tally. Overall, investors were not particularly pleased with the recent earnings release, and the stock price continued its descent. In part, this is due to the company’s history of reporting dramatic growth over the past decade. Anything less is considered a disappointment. In addition, investors appear concerned that the iPhone 5 may be losing ground to rival smartphones that use Google’s Android operating system. Profit margins have also been pressured by shorter product cycles, increased price competition, and growth in less-profitable products.
The significant decline in Apple’s share price looks to have made the stock more attractive from a valuation standpoint. Some of the headwinds the company is currently facing should abate, in time, and investor concerns may well prove to be overblown here. Risk-tolerant accounts may want to examine our individual report for this stock in The Value Line Investment Survey.
The BlackBerry 10 Arrives
The company formerly known as Research In Motion has introduced its long-awaited BlackBerry 10 operating system on two new handsets. These devices should be available with major carriers in the coming months. They will offer fast browsers, smart cameras, a large app library, and other new features. The company is also targeting the enterprise market with its BlackBerry Balance software. This offering allows work data and applications to be segregated on the device from the user’s personal data. Initial reviews have been somewhat mixed. Though the company’s new smartphones should have a shot at attaining customer acceptance, it appears unlikely these offerings will win significant market share from Apple devices or smartphones running Google’s Android operating system any time soon. Also noteworthy, management has elected to change the name of the company from Research In Motion to BlackBerry (BBRY). Its stock ticker is now BBRY.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.